Consider the following short-run model of the economy:
Goods Market Money Market
πΆ = 100 + 0.8(
π β
π)
π = 1000
πΌ = 40 β
π
πΊ =
π = 100
π = 5
πΏ(π,
π) =
π β 5r
a) Find the equilibrium interest rate, π*, and equilibrium level of income, π*.
b) Consider an equal increase in government spending and taxes to πΊ = π = 200. Find the
new equilibrium value for π*.