PLEASE ANSWER PARTS F, G AND H ONLY

The closed economy of Temptation Island is characterized by the following equations:

Consumption: C = 6000 + 0.85(Y - T)

Investment: I = 1500 - 300r

Government spending: G = 5000

Taxes: T = 4500

Real money demand: L = 0.65Y - 500i

Expected inflation = 0

Production function: Y = (K)^1/2(L)^1/2 (i.e. K to the power 0.5 times L tot he power 0.5)

The nominal money supply = 35000

Note: Interest rates, both i and r, are expressed in percentage points, i.e., if r = 5.5, then the real interest rate is interpreted as being equal to 5.5%.

Suppose the IS-LM model can be to describe Temptation Island, and answer the following questions. Keep your answer to at least THREE decimal points if necessary.

a) Derive the IS and LM equations for this economy. (4 points)

b) Suppose we are in the base period, so the price level is fixed at 1.00. Calculate the resulting short-run equilibrium values of real output, real interest rate, investment, consumption, the government budget balance, and price level. (3 points)

c) Suppose, in the long-run, 64000 (real) units of capital are utilizedand 36000 workers are employed. Calculate the resulting full-employment values of real output, real interest rate, investment, consumption, the government budget balance, and the price level. (3 points)

d) Suppose the government decides to change the level of taxation to create budget surplus of 600. Calculate the resulting (new) short-run equilibrium values of real output, real interest rate, investment, and consumption. Determine the unemployment rate that results in short-run equilibrium. (6 points)

e) Suppose, instead, we are also told that when the economy was in long-run equilibrium (in part C, above) 1500 people were unemployed. Further, when the shock hit the economy (in part D, above) in net terms no people have exited the labour force. Determine the unemployment rate that results in the short-run equilibrium from part D. What portion this unemployment is represented by cyclical unemployment and what portion is comprised of those in the natural rate (level of) unemployment (NRU). (4 points)

Hint: Cyclical unemployment is the level of unemployment that results from deviations of output from the full-employment level (Actual U = Cyclical U + NRU).

f) When the economy returns to long-run equilibrium what unemployment rate should we expect to see? Explain why/when this makes sense. (4 points)

g) Determine the (new) LR equilibrium values of real output, real interest rate, investment, consumption, and the real money supply that result due to the shock described in part D (above). (6 points)

h) Draw one well labeled IS/LM diagram that depicts the initial LR, the new SR and new LR equilibria for this economy. Be sure to clearly identify the different equilibrium points on your diagram, but no further written explanation is required. (5 points)