Consider the following numerical example of the IS-LM model: = 300 + 0.25 = 150 + 0.25 1000 G=250 T=300 i=0.05

a) Find the IS relation.

b) What is the equilibrium output for this economy? Find C and I at the equilibrium level of income and the interest rate.

c) Suppose the CB changes the interest rate to 3%. How does this change the LM curve? Solve for Y, I and C, and describe in words the effects of this policy. Graphically demonstrate this policy with shifts.

d) Return to the initial situation with interest rate set by the CB at 5%. Now suppose the government spending increases to 400. Recalculate Y, C and I at the new equilibrium level. Graphically demonstrate this policy with shifts.