On Mermaid island ( a closed economy in the SR), The Mermaids are in a pickle. Someone has decided to counterfeit money. Unfortunately, the counterfeiter is excellent at her job and it is impossible to know the difference between the real and fake money.

Their economy can be expressed as:

C = 50+0.95(Y-T)

T = 2000

G =2000

I = 1000-50r

M = 10000

P = 2

L(r,Y) = Y -200r

While the initial impact of the counterfeit money (M=10,000 to 20,000) is that output will jump, some are worried that the inhabitants will stop using it as a medium of exchange, and the economy would be reduced to bartering - creating a depression. Your job, as a policy maker is to see how you might be able to neutralize the impact of the money and increase demand,

Question 1

1. Calculate the initial situation (M=10,000) and show the resulting aggregate variables in a table format.

2. Calculate the situation with increase money supply (M=20,000) and show the resulting aggregate variables in a table format.

Question 2

The government has tasked you with neutralizing the impact of the additional money in circulation, you can ONLY use fiscal policy (G, T or a combination of both) (the central bank does not want to reduce its own money supply) to bring back the interest rate to where it was.

Find 2 fiscal options to return r to 15 and show the resulting aggregate variables in a table format