Consider the following economy:

=80+0.4()=80+0.4()

=200+0.21000=200+0.21000

=500=500

=300=300

(/)=24000(/)=24000

/=3000/=3000

Assume r = i then answer below questions.

a. Derive the IS and LM relations.

b. Use the IS and LM relations from (a) to solve for the equilibrium levels of output (Y) and interest rate (i).

c. Based on your answers from (b), find values for consumption (C) and investment (I) in this equilibrium.

d. Fiscal expansion: Suppose government spending increases to 600. Find the new equilibrium levels of output, interest rate, consumption, and investment in short run (assuming the money supply remains unchanged).

e. Monetary policy: Suppose the central bank decreases the money supply to 2500. Find the new equilibrium levels of output in short run, interest rate, consumption, and investment (assuming government spending remains unchanged).