Question I QUESTION 2: IS-LM Consider an economy described by the following equations: C = 150+0.8Yd 1 = 400-700R NX = 300-0.15}' -SOOR = 0.8Y - 2000R Govemment spending is $300; there is no autonomous tax and the proportional tax rate is 25%; the nominal money supply (MS) is $ ,OOO; and the predetermined price level is I .2. a) b) c) d) Derive the equation for the IS curve. Derive the equation for the LM curve. Solve for the equilibrium income level and interest rate. (6 marks) (5 marks) (3 marks) i) Sketch the IS and LM curves on a graph and indicate the equilibrium income and interest rate found in part c above. (3 marks) ii) Assume now that foreigners reduce their demand for imported goods so that autonomous net exports fall. Represent this change on the graph that you sketched in part i above (use Y2 and R2 to denote the new levels of income and interest rate respectively). (3 marks)