(a) IS equation shows goods market equilibrium: Therefore, Y = C + I + G Or, Y = 200 + 0.25YD + 150 + 0.25Y - 1000i + 250 Or, Y = 200+ 0.25(Y-T) + 400+ 0.25Y - 1000i Or, Y = 600+ 0.25(Y - 200) + 0.25Y - 1000i Or, Y = 600+ 0.25Y - 50 +0.25Y - 1000i Or, Y = 550 + 0.5Y - 1000i Or, Y - 0.5Y = 550 - 1000i Or, 0.5Y = 550 - 1000i Or, Y = 1100 - 2000i ......IS equation. For LM equation there will be money market equilibrium i.e (M/P)d = (M/P)s So, 2Y - 8000i = 1,600 Or, 2Y = 1,600 + 8,000i Or, Y = 800 + 4,000i ......LM equation. (b). From IS and LM equation we can solve the equilibrium Y and i. IS = 1100 - 2000i , LM = 800 + 4,000i 1,100 - 2000i = 800 + 4,000i Or, 6,000i = 300 Or, i = 300/6000 = 0.05 Equilibrium interest rate = 0.05 = 5%. (Ans). Equilibrium level of Y = 800 + 4,000i = 800 + 4,000*0.05 = 800 + 200 = 1000. (Ans) (c). At equilibrium level of Y and i, i.e at Y = 1000 and i = 5% C = 200 + 0.25*(YD) Or, C = 200+ 0.25(Y - T) Or, C = 200+ 0.25(1,000 - 200)