An economy has full-employment output of 1000.

Desired consumption and desired investment are

C^d = 200 + 0.8(Y - T) - 500r; I ^d = 200 - 500r.

Government purchases are 196, and taxes are T = 20 + 0.25Y.

Money demand is M^d /P = 0.5Y - 250(r + ^e)

, where the expected rate of inflation, ^e, is 0.10. The nominal supply of money M = 9890.

a. What are the general equilibrium values of the real interest rate, price level, consumption, and investment?

b. Suppose that government purchases are increased to G = 216. What are the new general equilibrium values of the real interest rate, the price level, consumption, and investment?