Assume the following model of the economy, with the price level fixed at 1.0:
C = 0.6(Y - T)
I = 1000 - 40r (r is stated as a percent, not a decimal, i.e. 8% not 0.08)
T = 500
G = 600
M = 1000
Ma = 5Y - 50r (Demand for real balances)
a) Write a numerical equation for the IS curve, showing Y as a function of r alone.
b) Write a numerical equation for the LM curve, showing Y as a function of r alone.
c) The equilibrium level of r is ____ and Y is ____.
d) Now suppose that government purchases are increased by 100. The IS-LM curve (circle choice).