\Answer the following question.

Consider a relatively well-developed liberal-democracy,with a closed-economy; described by the following equations in the short-run:

*The Goods-and Services Market:

-Aggregate Consumption Spending: C (Yd) = 250 + .8Yd--where: *Yd = disposable income = *(Y- T) -Aggregate Investment Spending: I(r) = 120 - 20r -Annual Federal Income Tax Revenue: T = 100 -Government Spending: G = 150

-Equilibrium in the closed goods - and - services market:

S = I

Y = C(Y-T) + I(r) + G

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*The Money Market:

-Money demand: ( ) = L (r, Y) = .5Y - 50r -Exogenous Money Supply: ms = 1200 -Aggregate Price Level: p = 2 -Real-Money Balances: ( ) = (1200/2) = 600

-Equilibrium in the Money Market:

( ) = L(r, Y) --------------------------------------------------------------------------------------

i.) Derive the IS and LM functions/curves. ii.) Derive equilibrium aggregate output/national income/GDP (Ye) and the equilibrium real interest rate (re) [for (Ye), originally, round to the nearest whole number, and for (re) take it out to two decimal places]. iii.) Graph the IS and LM curves and label the equilibrium point at their intersection. iv.) Next, let's say the fiscal authorities for this particular country, consisting of some democratically-elected legislative body, a chief executive with legislative veto power, and some type of jurisprudential deliberative system-that all act as a check-and-balance to the other. The country's chief executive-at the advice of his closest economic advisors-concurrently, along with the primary legislative body of the country-agreed collectively and decided to implement expansionary fiscal policy in an attempt to stimulate aggregate demand (planned expenditures = AD = C+I+G) by increasing government expenditures by 75 billion over the next fiscal year; which in the aggregate would raise previous government expenditure levels to 225 billion. The plan can only be fully implemented through the country's discretionary budgetary process, passed in the legislature, signed into law by the chief executive. Before the push to ratify that specific budget-which included funds for the implementation of the fiscal expansion-the aforementioned fiscal authorities collaborated and attempted to substantiate the macro-prudential virtues of implementing the fiscal expansion by lobbying individual tax-payers directly and explicitly citing recently released statistical data points regarding the country's recent economic performance-which unambiguously elucidate its prior lackluster performance by highlighting various data points, which included the recent precipitous increase in both involuntary unemployment and unplanned business inventory

investment, coupled with a simultaneously precipitous decline in both inflation expectations and overall consumer confidence. After the collaborative effort regrading lobbying for the wisdom of the new direction of fiscal policy, the budget passed in the country's legislature, and then it was signed into law by the chief executive. Given the recent passage of the new budget-which brought to fruition a substantial shift in the size, scope, and direction of this particular country's discretionary stabilization policies. All else equal, derive the new IS function/curve, use the same LM function/curve (because only the IS function/curve is initially affected when there are fluctuations in the level of expansionary fiscal policy), and then derive the new equilibrium levels of aggregate output/national income/GDP (Ye) and the real interest rate (re), [*round to the nearest whole number for (Ye) and to two decimal places for (re)]. v.)Finally, in addition to labeling your aforementioned initial equilibrium position in part iii), label the new revised equilibrium position-where the two IS/LM functions/curves intersect; after the change in government spending-on your previous graph. Also, describe intuitively, in a couple sentences, why an increase in government spending caused aggregate output/national income (Ye), and real interest rates (re), to both rise.