QUESTION TWO:(20 MARKS)

a)Given the following equations from a certain economy:

C = 100 + 0.8Y^d(Consumption function)

I = 10 - 10r(Investment function)

L = Y-100r(Real money demand)

G = 10(Government purchases)

T = 0.25(Tax rate)

M = 295(Real money supply)

Required

i.)Calculate the monetary multiplier policy and interpret it.(4 marks)

ii.)Suppose equilibrium income increases by 40, by how much must real money stock increases for the new level of income to be in equilibrium.(2 marks)

Derive the slope of the LM curve and demonstrate how it affects the effectiveness of monetary policy.