Suppose an economy is described by the following equations:

Consumption: C= 100+.8*(Y-T)

Taxes: T=30

Government Spending: G=30

Investment: I = 400-50*R

where Y stands for GDP and R the interest rate.

Let P represent the price level and

Money Demand: M^d/P = Y - 100*R

Money Supply: M^s =2260

Long Run Aggregate Supply = Y^LRAS=1530

Short Run Aggregate Supply: Y = Y^LRAS +.5(P - Expected Price)

1. Suppose, now, that G increases to 50. Draw and label a stylized (i.e. not necessarily to scale) SRAS-LRAS-AD graph representing the impact of this change.

2. Suppose the Federal Reserve would like to prevent the price level from rising. Explain a policy intervention the Federal Reserve could undertake to accomplish this goal using bothan IS-LM and SRAS-LRAS-AD graph. You do not need to calculate the exact policy change.

3. Suppose the Federal Reserve does not change policy, and the change in government spending (G) is permanent. How will the economy return to the long-run equilibrium? Illustrate your answer using bothan IS-LM and SRAS-LRAS-AD graph. You do not need to calculate the exact policy change.