Questions #3~7. Now suppose that the following additional equations have modified how the economy above behaves. These new equations show how the private investment is determined and how the financial market is operated.

In this new formulation, we assume that the private investment is no longer fixed, but instead positively correlated with the past sales, while negatively affected by the interest rate. In addition, the publics real money demand and the Central Banks real money supply is also given as follow: (Cf. Professors Ch. 5 lecture note and in-class exercise)

C=200+0.25YD

I=150+0.25Y-1000i

G=250, T=200, TR=0

(MP)d=2Y-8000i

(MP)s=1600

3. Based upon the relevant information above, derive the IS equation that shows the equilibrium output-income determined in the product (goods) market. Your answer must take the form of Y* = 0000 0000i.

4. Based upon the relevant information above, derive the LM equation that shows the equilibrium interest rate determined in the financial market. Your answer must be of the form i* = 0000Y 0000.

5. Solve for the numerical value of the equilibrium output-income by substituting the equilibrium interest rate equation (that you found in the question #4) into the equilibrium output-income equation (that you found in the question #3).

6. Solve for the numerical value of the equilibrium interest rate by substituting the value of the equilibrium output-income (that you found in the question #5) into the interest rate equation (that you found in the question #4).

7. Based upon the equilibrium output-income and the equilibrium interest rates that you have found in the previous two questions, calculate the actual numerical values of total consumption, C, the total investment, I, and the aggregate demand.

(1) Total consumption (C) =

(2) Total investment (I) =

(3) Total aggregate demand (AD) =