= = Problem 4. The consumption function is C = 20 + 0.75YD, the investment demand is I = 40 200r, government spending is G = 50, taxes are T = 60 and transfers are TR = 20. The interest rate rule is p= -1.35 +0.005Y + 41. The rate of inflation is constant and equal to a = m = 0%. (A) Find the short-run equilibrium. Call it point A and show on IS/MP diagram. (B) The government sends stimulus checks to the population, adding 10 to the transfers. Find the new short-run equilibrium. Call it point B and show on the same IS/MP diagram. (C) Now suppose that, alternatively, the central bank abandons the interest rate rule. If the central bank was worried only about inflation and did not respond to the output gap, what interest rate would be set in part B? What would output be equal to? Call this point C and show on the same IS/MP diagram. = = Problem 4. The consumption function is C = 20 + 0.75YD, the investment demand is I = 40 200r, government spending is G = 50, taxes are T = 60 and transfers are TR = 20. The interest rate rule is p= -1.35 +0.005Y + 41. The rate of inflation is constant and equal to a = m = 0%. (A) Find the short-run equilibrium. Call it point A and show on IS/MP diagram. (B) The government sends stimulus checks to the population, adding 10 to the transfers. Find the new short-run equilibrium. Call it point B and show on the same IS/MP diagram. (C) Now suppose that, alternatively, the central bank abandons the interest rate rule. If the central bank was worried only about inflation and did not respond to the output gap, what interest rate would be set in part B? What would output be equal to? Call this point C and show on the same IS/MP diagram