Consider the following closed-economy with fixed price P=1 and a given capital stock K.

Y = C + I + G (1)

C = C(Y+B-T, A), 0 < CY+B-T < 1, CA >0 (2)

I =I(R) IR < 0 (3)

T = T0 + t(Y+B) 0 < t < 1 (4)

M= L(Y,R,A) LY>0, LR<0, 0A<1 (5)

A = K + M + B/R (6)

G+B = T+ dM/dt + (1/R)dB/dt (7)

where Y is output, C is consumption, I is investment, G is government expenditure, B is government debt,

T is taxes, A is private wealth, R is the rate of interest, T0 is the exogenous lump sum tax, t is the marginal

tax rate, K is the capital stock,. M is the money supply,

a) Briefly describe and interpret the equations of the model.

b) Find the equation for the IS schedule and its slope. Determine how the IS schedule will change if there

is: (i) an increase in G, (ii) an increase in B and (iii) an increase in M?

c) Find the equation for the LM schedule and its slope. Determine how the LM schedule will change if there

is: (i) an increase in G, and (ii) an increase in B and (iii) an increase in M?

d) The quasi-reduced from of the model can be expressed as Y=AD(G,B,M) and R=H(G, B, M). Based on

your answers for b and c above, show either algebraically or diagrammatically how Y and R will change if

there is: (i) an increase in G, and (ii) an increase in B and (iii) an increase in M? Explain the concisely

intuition behind your results in each case.

e) Suppose the government adjust T0 to ensure that the additional government expenditure is financed by

means of additional taxes. Compute the balanced budget output multiplier in this case.

f) Is the above balanced budget multiplier larger or smaller than the balanced budget multiplier in the simple

Keynesian cross model in an first year Introductory Macroeconomics course? Explain the differences and

intuition.