Section 11- Solve (max marks 15)- Draw graphs to support your findings

Q. Consider the following Keynesian Economy,

Desired ConsumptionC(d)= 200 = 0.6 (Y-T) -200 r

Desired InvestmentI(d) = 300- 300r

TaxesT= 20 + 0.2 Y

Government PurchasesG= 152

Net exportsNx = 150 - 0.08 Y -500 r

Money DemandL= 0.5 Y - 200 r

Money SupplyM = 924

Full-employment outputY= 1000

a)What are the general equilibrium values of output, real interest rate, consumption, investment, net exports, and the price level? (long run)

b)Starting from full employment, government purchases are increased by 62. What are the effects of this change on output, real interest rate, consumption, investment, net export, price level in the short run?

c)With government purchases at their initial level, net exports increases by 62. Compare your answer to that of part b.

d)Derive the equation for IS curve for this economy

e)Derive the LM curve for this economy

f)Find thereal interest rate and output level for general equilibrium for this economy

g)Derive the Aggregate demand curve for this economy.

Now suppose the real exchange rate 'e' is given by

e= 67- 0.005Y+ 0.002Y (for) +100r - 300r (for)

The foreign (for) price level is P(for) = 115 units of foreign currency per foreign good, and Y(for) is 900.

Calculate values of the real exchange rate and the nominal exchange rate for this economy when in long run equilibrium.