Consider an economy characterized by the following IS-LM model

= 130 + 0.5

= 20 + 0.2 90

= 200

= 100

Interest rate = =0.05

a. Derive the IS relation.

b. The central bank sets an interest rate of 5%. What is the equilibrium value of output ? Equilibrium implies an equilibrium in both goods and financial market. Hence solve the IS and LM simultaneously. In this case, replace the interest from LM into IS

c. Solve for equilibrium levels of consumption and investment

d. If both G and T increase by 50 (a balanced budget fiscal policy), would the equilibrium output change? Show or explain