An economy is initially described by the following equations:

/=60+0.8()=1205=25=200=200=3000=3C=60+0.8(YT)I=1205rM/P=Y25rG=200T=200M=3000P=3

a. Derive and graph the IS and LM curves. Use the accompanying diagram to graph the IS and LM curves by placing the endpoints at the correct location, then place point A at the equilibrium interest rate and level of income.

b. Suppose that a newly elected president cuts taxes by 25 percent. Assuming the money supply is held constant, what are the new equilibrium interest rate and level of income? What is the tax multiplier?

c. Now assume that the central bank adjusts the money supply to hold the interest rate constant. What is the new level of income? What must the new money supply be? What is the tax multiplier?

d. Now assume that the central bank adjusts the money supply to hold the level of income constant. What is the new equilibrium interest rate? What must the money supply be? What is the tax multiplier?