Consider the economy of Ghana

a.The consumption function is given by:

C=200+.75(Y-T)

The investment function is given as

I=200-25r

Government purchases and taxes are both 100. For this economy, graph the IS curve for the r changing from 0 to 8

b.The money demand function in Ghana is

(M/P)^d =Y-100r

The nominal money supply is 1000 and the price level is 2. For this economy, graph the LM curve ranging from 0 to 8

c.Find the equilibrium interest rate(r) and the equilibrium income(y)

d.Suppose the government purchases are raised from 100 to 150. How does the IS curve shift?

What are the new equilibrium levels of interest rate and income?

e.Suppose instead that money supply is raised from 1000 to 1200. How does the LM curve shift?

What are the new equilibrium levels of interest rate and income?

f.With the initial values of fiscal policy, suppose that the price level rises from 2 to 4. What happens? What are the new equilibrium interest rates and income levels?

g.Derive and graph the equation for the aggregate demand curve. What happens to this aggregate demand curve if fiscal or monetary policy changes as in part (a) and (e)