I.

The following equations describe an economy. Think of C, I, G, etc., as being measured in billions and i as a percentage, e.g., a 5 percent interest rate implies i = 5.

C = 0.8 (1- t) Y t= 0.25 I = 900-50i G = 800 L = 0.25Y - 62.5i M = 500 P = 1 In this economy the IS curve is given by Y = 4250 - 125iandthe LM curve is given by Y =2000 + 250i.

(a) Find the equilibrium levels of (i) output, (ii) interest rate, and (iii) investment.

For parts (bl. (cl, and (di only - Suppose that G increases by 300. Then, answer the following (b) What is the size of the horizontal shift in the IS curve? (c) What is the change in equilibrium of (i) output, (ii) interest rate, and (iii) investment? (d) How much is the crowding out effect on output?

(e) Derive the aggregate demand curve of this economy when G is at its original level of 800.