A simplified economy is specified as below. Round your answers to 2 decimal places, if applicable.

A. Goods market, all values of C, I, G and NX are in billions of C$:

Consumption expenditure: C = 130 + 0.8(Y- T)

Investment expenditure: I = 1,200 - 420i

Government expenditure: G=250

Lump-sum constant taxes: T = 250

Exports: 80 Imports: 10

B. Money market, all Md values are in billions of C$: Interest i = 0.1 (which is 10%)

Money demand: Md = 760 - 1,900i (i) Find the equilibrium Y, money supply, C and I. Define interest rate i as 0.1, not 10

(ii) Fiscal Policies: Now suppose there is an impending federal election, and the government promises to use fiscal policies to stimulate the economy.

(a) If the economy is 12% below its targeted income Yp = 8,000, calculate the change in government expenditure

required to achieve Yp

(b) Find the values of the government budget balance (BB) before and after the fiscal stimulus

(iii) Monetary Policies: Now consider monetary policies only. Suppose the BOC wants to drop the i to 0.05 (or 5%), with G still at $250. (a) Solve for the I compared to when i=0.1.How much would you expect Y to rise by?

(b) Find the new equilibrium Y and money supply

(iv) Contrast fiscal and monetary policies: Briefly discuss one problem associated with fiscal policies and one problem associated with monetary policies, respectively