Consider the following model of the economy Production function: Y = AKN - N²/2 Marginal product of labor: MPN = AK - N. where the initial values of A = 6 and K = 10. The initial labor supply curve is given as: N^S= 40 + 4w Initial conditions in the goods market C^d= 80 + .50(Y-T) - 500r I^d= 800 - 500r G = 100 T = 100 M^d/P = 158 + 0.5Y- 1000(r + ^e) Nominal Money supply M = 4000 Expected inflation is equal to 2% (^e= 0.02)

SCENARIO #1 - AN IS SHOCK! Suppose that the President and Congress pass a tax cut bill so that T falls by 40 (from 100 to 60) S1a) What is the new, short run (fixed price level) expression for the IS curve? Please show all work. S1 b) What is the short run, Keynesian (fixed price) level of equilibrium output and real interest rate? Please show all work. Please label these new short run conditions to your four diagrams as point B. Be sure to label diagrams completely with the inclusion of all the relevant shift variables like we did numerous times in the video lectures. S1 c) In the short run, what is the value of the tax multiplier (Y/T)? S1 d) Find the real interest rate associated with the long run general equilibrium. S1 e) Find the new price level associated with the long run general equilibrium. Please label these long run conditions to your four diagrams as point C. Be sure to label diagrams completely with the inclusion of all the relevant shift variables like we did numerous times in the video lectures. S1 f) Now we know that one of the Fed's mandates is price stability. What would the Fed have to do, in terms of open market operations, so that the price level remains at its initial value? Assume the money multiplier is 0.8. Please show your work.