1.The following equations describe a small economy. Figures are given in millions of dollars; interest rate (i) is in percent per annum. Assume that the price level (P) is fixed.

Goods Market

C = Co + cYD (Private consumption)

YD = Y + TR - T (Disposable income)

T = To + tY (Total taxes)

I = Io - bi (Private investment)

G = Go, TR = TRo (Gov. Expenditure and Transfers, respectively)

Y = C + I + G (Goods mkt. equilibrium condition)

Money Market

L = kY- hi (Demand for real balances)

Ms = Mo/P (Real money supply)

L = Ms (Money mkt. equilibrium condition)

Endogenous Variables: C, YD T, I, Y, L, Ms and i

Exogenous Variables: Co = 400, To = 80, Io = 450, Go = 600, TRo = 100, Mo = 450, P =1

Parameters: c = 0.85, t = 0.25, b = 50, k = 0.25 and h = 62.5

Policy variables: Fiscal policy: (G, t and TR) Monetary policy: (Mo, P)

Using the above information:

a.Derive the equation for IS curve.

b.Derive the equation for LM curve.

c.Compute the value of equilibrium level of income(Y*) and the rate of interest (i*).