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Consider the following numerical example of the lSLM model: T : 200 C = 200 + 0.25YD E: 0.05 2 _ - M I 150

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Consider the following numerical example of the lSLM model: T : 200 C = 200 + 0.25YD E: 0.05 2 _ - M I 150 + 0.25Y 100m _ 2 2y _ 80002. G = 250 P (a) Derive the IS relation. (b) If the central bank sets an interest rate of 5%. What is the equilibrium output, con sumption and investment? (c) Now suppose, the central bank cuts interest rates to 3%. What is the new equilibrium output? Illustrate the change using the ISLM diagram and explain the effect in words (i.e. explain what happens to each curve/line and why)

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