1) Suppose an economy is described by the following equations: C = a+ b(Y - T) - hr = 200 + 0.75(Y -T) - 10r I = c- dr = 800 - 15r G = 200 L(r, Y) = eY - fr = 2Y - 200r M = 18,000 P = 5 where a, b, c, d, e, f and h are model parameters and C, Y, I, G, T, r, L, M, and P denote consumption, output, investment, government spending, taxes, the interest rate, liquidity preferences, the money supply and the price level, respectively. The government is running a balanced budget. a. Derive a general expression for the IS and the LM curves in terms of the parameters a, b, c, d, e, h, f and the exogenous variables G, T, M and P. Substitute the values of the parameters and the exogenous variables and plot the two curves. b. Provide an explanation of why consumption may depend on the interest rate. How does the relationship between consumption and the interest rate affect the slope of the IS curve? Briefly explain. c. Find the equilibrium interest rate and the equilibrium level of income. d. Derive an expression for aggregate demand and plot the aggregate demand curve. e. Suppose that both taxes and government spending increase to G' = T' = 800. Analyse the effect on the economy with the help of the appropriate graphs