Consider the following numerical example of the IS-LM model:

C = 100 + 0.3(Y_D)

I = 150 + 0.2Y - 1000i

T = 100

G = 200

I policy = 0.01 (in percent 1%)

(M/P)^s= 1200

(M/P)^d= 2.Y - 4000.i

Note: You can solve the problem in two regimes of monetary policy: 1. Money targeting, where the central bank fixes the money supply; 2. Inflation targeting, where the central bank sets the level of the policy interest rate.

a. Find the equation for aggregate demand (Y).

b. Derive the IS relation.

c. Derive the LM relation if the central bank sets an interest rate of 1%.

d. Solve for the equilibrium values of output, interest rate, C and I.