Consider a closed economy that is characterized by the following equations:

(1) Y=C+I+G

(2)C=500+0.75(Y-T)

(3)I=375-25r

(4)T=500

(5)G=500

(6)Md=Ms

(7)Ms=1000

(8)Mt=0.5Y

(9)Msp=-50r

Where Y is the GDP , C is private consumption expenditure, I is the Investment expenditure, G is government expenditure, T is tax revenues, Ms is money supply, Mt is transaction demand for money,Msp is the speculative demand for money andis the interest rate (in % points).

1.Derive (Md/P) the demand for real money balances equation (whereP is the aggregate price level.)(2 Mark)

2.Derive the IS and LM equations of the economy (Express Y as a function ofand assumeis fixed at 1.0.)(4 Marks)