Consider a closed economy where the goods and money markets are described by the following relationships: C = 200 + 0.9(Y - T) 1 = 400 - 15r M = 200 + Y - 100r G = 150 T = 100 M = 2000 P = 2 Where C is planned consumption, I is 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) Derive the two expressions for the IS and LM equilibrium relationships respectively. Sketch a graph of the two relationships. [5 marks] Answers for a) 0.1Y + 15r = 660 (IS curve) Y - 100r = 800 (LM curve) 40 35 30 25 (3120, 23.2) interest rate (r) - 15 curve - LM curve 15 10 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 Outputb) Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point). Compute also the level of consumption and investment spending in equilibrium and check whether the actual level of spending matches the equilibrium level of output. [5 marks] Answer to b) Y = 3120 r = 23.2 C = 2918 | = 52 Actual spending = Equilibrium output = 3120 e) Suppose that an economist suggests that the equilibrium in the money market should be described by the following equation: M F=37.6+Y93r 1) With all other behavioural equations as in part (a) (assume that taxation and money supply are at their original level of T = 100 and M = 2000) solve for the equilibrium values of the interest rate and output. Use a graph to show the difference between your result with the one you obtain in b) above. [4 marks] Answer: ? ? '7