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

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

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

Derive ) the demand for real money balances equation (where is the aggregate price level.) (2 Mark)

Derive the IS and LM equations of the economy (Express as a function of and assume is fixed at 1.0.) (4 Marks)