a)Consider an economy characterized by the following relationships:

Consumption:C = 20 + 0.5(Y - T)

Investment: I = 25 - 200i

Money Demand:M_d = Y(0.5 - i)

Assume that initially government spending G is set at 20, the budget is balanced, and the money supply is chosen so that the interest rate, i = 0.05.The natural level of output in the economy is Y = 100. You will consider four alternative policies that could bring the economy to full employment.

i)Suppose instead that the government tries to achieve full employment by raising spending, while central bank expands the money supply to keep the interest rate constant.How large an increase would be necessary? [5 Marks]

ii)Suppose the government does not want to run a deficit.Therefore, it matches its spending increase with tax increases.How much must G and T rise?[5 Marks]