Consider the following economy:

Desired consumption Cd = 240 + 0.8(Y-T) - 40r Desired investment Id = 100 - 20r

Real money demand Md/P = Y - 600i Expected Inflation e = 0.0

A) Suppose that G = T = 100 and that money supply M = 3420. Find an equation describing the IS curve. Find an equation describing the LM curve.

B) Find an equation for the aggregate demand AD curve. Then using the LRAS = 1770, calculate the equilibrium price level.

C) Suppose both the government purchases and taxes increase to 200. (G = T = 200). Assume that full-employment output is fixed as in the above question. What would happen to the new equilibrium price? Does the price increase or decrease or stay constant? Why? (You may answer this just by graphical or intuitive explanation without deriving actual numerical solution.)