Question
In a closed economy of Bigbluff, the demand for real money balances can be expressed by (M/P) d = 0.34Y-60r, where r is the real
In a closed economy of Bigbluff, the demand for real money balances can be expressed by (M/P)d = 0.34Y-60r, where r is the real interest rate in percentage terms (e.g., r = 1 if the interest rate is 1 percent). The price level is fixed at 0.5, and the money supply is fixed at 1385. In addition, the economy-wide consumption C, planned investment I, and government purchases G satisfy: C = 110+0.75(1- t)Y,
I = 2100 - 70r, G = 820, where t represents the rate of income tax. (1) Please derive the algebraic expression for LM curve. (2 marks) (2) Given that the tax rate is 12% in Bigbluff. Show the equilibrium output level and interest rate.
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