Problem 1. Suppose the economy is given by the following: Consumption function: C= 26 + 0.6(Yd) Investment function: I 23 -50r Government spending: G 10 Tax collections: T 10 Exports schedule: X= 6- Imports schedule: (1M) = 2 + 3 Money supply: M 492 Nominal Money demand 5Y-50r Price level=l Labor supply50 Production function=2N QUESTIONS a) b) c) d) e) f) g) h) i) j) k) l) Find the equation ofthe IS curve Find the equation of the LM curve Find the equation for the AD Plot the IS and LM equations in terms of r and Y Plot the IS and the LM equations in terms of Find the equilibrium output and interest rate for this economy assuming a free floating exchange rate regime and a world interest rate r* of 0.16. Suppose the government decides to increase G to 12. Compute the new short-run equilibrium levels of output, and exchange rates. Graph and explain the adjustment of the economy to this shock Suppose now that the Fed decides to decrease M to 400 (assume G is 10). Compute the new equilibrium levels of output, and exchange rates. Graph and explain the adjustment of the economy to this money supply shock in the longer run once prices and wages start adjusting. Suppose now that the country follows a fixed exchange rate regime. Explain what this means and why some countries may want to follow such a regime. Calculate now the effects of the fiscal shock mentioned in g). What is the reaction of the Fed to this shock? Graph your results m) Calculate the effects of the monetary shock mentioned in i). Graph your results. n) Based on your results, explain the differences in the effectiveness of economic policies in each of the two exchange rate regimes.