Question 4. Suppose in a country A, its economy can be described as the following equations, Y = C+I+ G; national output or GDP. C= 100 + 0.5 (Y-T); consumption, marginal propensity to consume MPC = 0.75. I= 150-10 * r; investment which is a negative function of real interest rate (r). (M/P)d =Y - 30 * r; real money demand which is adjusted by price level (inflation). G = 200; government spending. T = 200; tax. M=2,400; money supply. P = 4; price level. (1) With the equations above, try to derive the IS curve. Tip: recall IS curve represent the relation between national output (Y) and real interest rate (r) in goods market. So to derive IS curve, you need to put all components of Y together and find its connection with r. (2) Use the same equations, now try to derive the LM curve. Tip: recall LM curve represent the relation between national output (Y) and real interest rate (r) in money market. So to derive LM curve, you need to consider money supply and demand. (3) What are the equilibrium level of national output (Y) and the equilibrium interest rate (r)? Tip: recall the IS-LM model represent the short-run equilibrium in both goods market and money market. The intersection of the IS curve and the LM curve satisfy conditions for equilibrium in the two markets. You can get equilibrium interest rate (r) and equilibrium level of output (Y). (4) If price level (P) increases from 4 to 6, which curve would shift in this case, the IS curve or the LM curve? What would happen to the new equilibrium interest rate (r) and equilibrium level of output (Y)? Tip: this question practices how to derive aggregate demand (AD) curve, which presents a negative relationship between price level (P) and national output (Y)