The following equations describe an economy:

C=100+0.9Y^D

I=130-10i

G=200

TA=200

L=0.8Y-100i

M=1100

where C is consumption, Y^Dis disposable income, I is investment, i is interest rate, Gisgovernment expenditure, TA is lump-sum taxes, Y is income, L is demand for real balance, M is the nominal money supply.

(a)What are the (i) the marginal propensity to consume out of disposable income, and (ii) marginal propensity to consume out of total income?

(b)Derive the IS and LM equations for the economy assuming that the price level is given by P = 1.

(c)Solve for the equilibrium levels of (i) output and (ii) the interest rate.

(d)Derive the aggregate demand (AD) curve for the economy. Suppose the government spending on goods and services (G) is increased by 180.

(e)Determine the size of the horizontal shift of the IS curve; that is, how much can output increase if the interest rate is maintained at the same level as in part (c).

(f)Find the equilibrium levels of (i) output and (ii) interest rate when the change in the interest rate is taken into account.

(g)Based on your calculations from part (d) and (e), how much is the crowding-out effect on output?