Consider the following short-run IS-LM model. Assume the central bank targets thenominal interest rate and expected inflation is zero.

C = 300 + .50Y_D

I = 1000 + .10Y - 5000i

G = 700

T = 600

M/P = 100 + .25Y - 6250i

P = 1

i = .06

Y-T = Y_D

a. Solve for the IS equation and the LM equation.

b. Find the slope for each curve and explain its meaning.

c. Find the equilibrium and also show it on a graph of IS-LM.

d. Find the equilibrium values for C, I, and the money supply M.

e. Consider a fiscal stimulus: what is the impact on Y if G rises by 100? What is the impact on I in this case?

f. What is the impact on the interest rate and the money supply?

g. Return to your original analysis. Consider a monetary stimulus where the central bank sets a new target interest rate, i = .04. Find the new equilibrium values for Y, C, and I.

h. Find and discuss any change in the money supply.

i. What causes the change in I in this case? Explain.