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new equilibrium, assuming that the central bank leaves the mon- etary base unchanged. (c) Suppose that the reserve-todeposit ratio returns to 0.1, but the consumers and investors become less optimistic about the future. As a result, the consumption function changes to: C = 100 + 0.75(Y T) while the investment function changes to: I = 100 50?" Find the new equilibrium, assuming that the interest rate must remain nonnegative. (d) Suppose that the government wants to stimulate aggregate de- mand. Would a fiscal or monetary policy be more effective? Can you propose a policy change that would bring the equilib- rium output back to the same level as in part (a)? 3. (30 points) Consider an economy which is described by the following equations: 0 = 500 + 0750/ T) I = 1000 507- (M/P)d = Y 2001" G = 1000 T = 1000 M = 6000 P = 2 where Y denotes the aggregate income, T denotes taxes, G de- notes government expenditures, 0 denotes consumption, I denotes investment, M denotes the money supply, P denotes the price level, and 'r is the interest rate. Furthermore, suppose that the cash-to- deposit ratio is equal to 0.2, while the reservetodeposit ratio is equal to 0.1. (a) Derive the equations for the IS and LM curves, and find the equilibrium in this economy. (b) Suppose that, as a result of a financial crisis, banks in this econ- omy are less willing to give out loans and prefer to hold larger reserves instead. This causes the reservetodeposit ratio to in crease to 0.2, while the cash-todeposit ratio remains unchanged. What happens with the IS and LM curves as a result? Find the [7.51