The closed economy of Temptation Island is characterized by the following equations Consumption C 6000 0 85(Y T) Investment I 1500 300r Government spending G 5000 Taxes T 4500 Real money demand L 0 65Y 500i Expected inflation p e 0 Production function Y K 1 2 L 1 2 The nominal money supply 35000 Note Interest rates, both i and r, are expressed in percentage points, i e , if r 5 5, then the real interest rate is interpreted as being equal to 5 5 Suppose the IS LM model can be to describe Temptation Island and answer the following questions Keep your answer to at least THREE decimal points if necessary Derive the IS and LM equations for this economy Suppose we are in the base period, so the price level is fixed at 1 00 Calculate the resulting short run equilibrium values of real output, real interest rate, investment, consumption, the government budget balance, and price level Suppose, in the long run, 64000 (real) units of capital are utilized and 36000 workers are employed Calculate the resulting full employment values of real output, real interest rate, investment, consumption, the government budget balance, and the price level Suppose the government decides to change the level of taxation to create a budget surplus of 600 Calculate the resulting (new) short run equilibrium values of real output, real interest rate, investment, and consumption Determine the unemployment rate that results in short run equilibrium Suppose, instead, we are also told that when the economy was in long run equilibrium (in part C, above 1500 people were unemployed Further, when the shock hit the economy (in part D, above in net terms no people have exited the labor force Determine the unemployment rate that results in the short run equilibrium from part D What portion of this unemployment is represented by cyclical unemployment and what portion is comprised of those in the natural rate (level of) unemployment (NRU) Hint Cyclical unemployment is the level of unemployment that results from deviations of output from the full employment level (Actual U Cyclical U NRU) When the economy returns to long run equilibrium what unemployment rate should we expect to see Explain why when this makes sense Determine the (new) LR equilibrium values of real output, real interest rate, investment, consumption, and the real money supply that result due to the shock described in part D (above) Draw one well labeled IS LM diagram that depicts the initial LR, the new SR, and new LR equilibria for this economy Be sure to clearly identify the different equilibrium points on your diagram, but no further written explanation is required

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The closed economy of Temptation Island is characterized by the following equations: Consumption: C = 6000 + 0.85(Y - T) Investment: I = 1500 -

The closed economy of Temptation Island is characterized by the following equations:

Consumption: C = 6000 + 0.85(Y - T)

Investment: I = 1500 - 300r

Government spending: G = 5000

Taxes: T = 4500

Real money demand: L = 0.65Y - 500i

Expected inflation: p^e= 0

Production function: Y = K^1/2L^1/2

The nominal money supply = 35000

Note: Interest rates, both i and r, are expressed in percentage points, i.e., if r = 5.5, then the real interest rate is interpreted as being equal to 5.5%.

Suppose the IS-LM model can be to describe Temptation Island and answer the following questions. Keep your answer to at leastTHREEdecimal points if necessary.

Derive the IS and LM equations for this economy.
Suppose we are in the base period, so the price level is fixed at 1.00. Calculate the resulting short-run equilibrium values of real output, real interest rate, investment, consumption, the government budget balance, and price level.
Suppose, in the long run, 64000 (real) units of capital are utilized and 36000 workers are employed. Calculate the resulting full-employment values of real output, real interest rate, investment, consumption, the government budget balance, and the price level.
Suppose the government decides to change the level of taxation to create a budget surplus of 600. Calculate the resulting (new) short-run equilibrium values of real output, real interest rate, investment, and consumption. Determine the unemployment rate that results in short-run equilibrium.
Suppose, instead, we are also told thatwhen the economy was in long-run equilibrium (in part C, above1500 people were unemployed. Further, when the shock hit the economy (in part D, above in net terms no people have exited the labor force. Determine the unemployment rate that results in the short-run equilibrium from part D. What portion of this unemployment is represented by cyclical unemployment and what portion is comprised of those in the natural rate (level of) unemployment (NRU).

Hint:Cyclical unemployment is the level of unemployment that results from deviations of output from the full-employment level (Actual U = Cyclical U + NRU).

When the economy returns to long-run equilibrium what unemployment rate should we expect to see? Explain why/when this makes sense.
Determine the (new) LR equilibrium values of real output, real interest rate, investment, consumption, and the real money supply that result due to the shock described in part D (above).
Draw one well-labeled IS/LM diagram that depicts the initial LR, the new SR, and new LR equilibria for this economy. Be sure to clearly identify the different equilibrium points on your diagram, but no further written explanation is required.