Closed Economy. Draw IS and LM. Multiplier. Equilibrium. New r,Y,P, D. Label. show all calculations and formulas. a,b,d,c,e

2. [Closed economy lS-LM] The CMC economy is initially described by the following equations 0 = 1000 + 0.750? T) I = 500 751' d. M (F) = Y 1001' G = 500 T = 1,000 M = 6,000 P = 2 Assume that the economy begins in long run equilibrium. a. Write down the equations for the IS and LM curves and calculate the equilibrium interest rate and level of income (6 pts) b. Draw a well-labeled graph of the IS and LM curve from part (a) and label the equilibrium as A. Going fonivard, label all the new equilibrium points on this same figure. (2 pts) c. It's an election year and the CMC legislature passes a bill to increase government spending to G = 1,500. Assuming the money supply is held constant, what is the new equilibrium interest rate (r) and level of output (1')? What is the government expenditures multiplier? Label the new equilibrium as B. (5 pts) d. The Central Bank specically targeted the interest rate (r) in part (a). Assuming G = 1,500, what action (if any) must the Central bank take in order to restore r from part (a) after the increase in government expenditures? (ideally, calculate a numerical value for the action). Label the new equilibrium as C. (7 pts) e. After restoring r from part (a), neither the Central Bank nor the CMC legislature take any further action. What is the new long-run equilibrium 1', Y, and P? Label the new equilibrium as D. Briey describe how the economy transitions to this new equilibrium. (5 pts)