Macroland is a closed economy. It can be described by the IS-LM model.

Long-run level of output: Consumption: Investment:

Government spending: Real money demand:

YFE= 20000

C = 3000 + 0.8(Y - T) - 150r I = 3000 - 350r

G = 4000

L(r, Y) = 0.5Y - 600r

Note:Interest rate, r, is expressed in percentage points, i.e., if r = 7.5, then r = 7.5%. Keep your answer to 2 decimal places if needed.

a)In the initial (long-run) equilibrium, the government of Macroland runs a budget surplus of 250 and the level of nominal money supply is set at 34400. Find the resulting long-run equilibrium values of real interest rate, private savings, price level, and real money balance. (5 points)

b)The economy is initially in its long-run equilibrium as shown in part (a). Now, due to the outbreak of the pandemic, there is an extensive use of online payment apps. As a result, the fraction of income holds in the form of money drops from 0.5 to 0.4. Find equilibrium values of real output, private savings, real interest rate, and real money balance in both short run and long run. (10 points)

c)(Continued from part b) Suppose the central bank wants to lower the short-run level of output in part (b) by 1375 via a change in the level of money supply. Find the level of money supply that would achieve the goal. What are the new short-run equilibrium levels of output and real interest rate? (5 points)