1. The following equations describe an economy.

IS Function

C = 500 + (.75)(1-t) Y

t = 0.20

I = 1500 - 75 (i)

G = 1000

LM Function

Real Demand for Money: md = .25 Y - 65 (i)

Real Stock of Money: ms = M/P = 600

a. i. Construct the equation for the IS function.

ii. Construct the equation for the LM function.

b. Given the IS and LM functions you derived in part a calculate the equilibrium income level and rate of interest?

c. Suppose there is a decrease in the income tax rate, t, from 0.20 to 0.10. What will be the change in the equilibrium level of income and interest rate?

d. Suppose there is new federal government infrastructure spending increasing

government expenditures (G) from 1000 to 2000, given the IS and LM functions of part "a" what will be the new equilibrium income level and interest rate?

e. By how much will private investment be crowded out as a result of this increase in

government purchases in part d?

f. Suppose there is an increase in the real stock of money (M/P) from 600 to 800 given

the IS and LM functions of part "a" what will be the new equilibrium level of income

and interest rate?

g. If the money demand equation were changed to md = 0.25Y (note the interest rate does

not enter the demand function for money) how would the IS and LM functions from

part "a" change? What would be the new equilibrium level of income, Y, and interest

rate,