Consider the following short-run IS-LM model. Assume the central bank targets the nominal 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 equilibrium and also show it on a graph of IS-LM.

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

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

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

f. 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.

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

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