The money demand and supply equations for our hypothetical economy are: Ma/P =-500 + 0.5Y - 20r (real money demand) M=/P = 4,000/P (real money supply) 1. Find the equation for the LM curve. 2. Using the IS curve from the solution to Question 2, find the equation of the AD curve. 3. Find the levels of GDP and the interest rate if P = 1. 4. What will happen to GDP and the interest rate if the price level rises to 1.1 or falls to 0.9? Question 2 The following equations are given for a hypothetical economy: C = 1500 + 0.5 (Y- T) Consumption function 1 = 500 + 0.3Y - 10r Investment function G = 2,000 Government spending (X -M) = 500 -0.2Y Net export function T= -500 + 0.2Y Tax function 1. Based on these equations, determine the combinations of aggregate income (Y) and the real interest rate (r) that are consistent with equating income and expenditure. That is, find the equation that describes the IS curve. 2. Given a real interest rate of 2 percent, find the level of GDP, consumption spending, investment spending, net exports, and tax receipts. Suppose the government increased expenditure from 2,000 to 2,500. Find the new IS curve. Does the increase in government spending result in an equal increase in equilibrium income for any given level of the real interest rate? Why or why not? Given a real interest rate of 2 percent, determine how the increased government spending is funded. 5. Suppose that the output/income level calculated in Question 2 is the most that can be produced with the economy's resources. If the economy is operating at that level when the government increases expenditure from 2,000 to 2,500 what must happen to maintain the balance between expenditure and income