1.Drive the AD (Aggregate Demand) curve using the following:

IS curve is given as Y = 20XX-100i, LM1 is Y= 1000+25i (when P = 1) and LM2 is Y= 500+25i (when P =2), where XX is 75. Show the derivation in (interest rate-income) and (price level-income) spaces. (Please insert a snapshot of the graphs if drawn manually).

2.Suppose the IS curve is Y = 39XX-100i and Y = 1500 + 250i is the LM curve, where XX is 75. Using these compute:

a)The equilibrium interest rate and output (i*and Y*).

b)If government spending was increased by 100m with an immediate impact elasticity of 2.5 in the goods market, determine new income and interest rate.

c)Determine the impact of the above policy on private investment if it is known that di/dA = XX/100, where XX is 75.

d)Determine the magnitude of the change in money supply required to eliminate any crowding out effect in (c) above. Suppose di/dMs = -0.1X, where X is 5.

e.) Explain the dynamics represented in (a-d) using an IS-LM space. (Please insert a snapshot of the graph if drawn manually)

3.Suppose that the following equations describe the 4-sector economy

Consumption function C= 60 + 0.8 Yd,

Investment function I= 100-5i,

% interest rate i=6 (use 6 to compute for the investment)

Government Expenditure G= 76

Lump sum Tax Tx= 15

Transfer payments TR=60

Exports X=70

Imports M=20+0.2Y

31. Calculate the equilibrium level of income. At this level of income, is the economy operating with a budget surplus or budget deficit?

3.2. Calculate the investment, government, tax, transfer payments and foreign trade multiplier.

3.3. Suppose that government increases its education and health services by 65, what is the new level of income?

3.4. If exports increase by 10, what is the new level of income? Is the economy operating with a trade deficit or surplus at this level of income?