Consider a closed economy where the goods and money markets are described by the following relationships: 6 = 200 + 0.9(Y T) I = 400 15r M F=200+Y100r G=150 T=100 M=2000 P=2 Where C is planned consumption, l i; planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. a) The government reduces taxation to T=50 i_r_1_9r_'d_er_tg boost economic activity. Assume no changes in the values of all the other variables. 1) What are the economy's equilibrium level of output Y and interest rate following the cut in taxation? Compute the equilibrium level of consumption and investment spending. With the help of the lS/LM graph, carefully explain what happens to the economy following the cut in taxation. [8 marks] Answer to a 1):: equilibrium output Y = 3300 r=25 consumption C =3125 investment I = 25 b) If the government intends to pursue monetary policy instead of scal policy ingrdertg achieve the same level of output that you computed in a.1), how much should money supply change by? Use graphs to show the change in the economy and explain very carefully the monetary transmission mechanism. [7 marks]