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Suppose that in a closed economy with a public sector the following relations apply: Consumption function:...

Suppose that in a closed economy with a public sector the following relations apply: Consumption function: C = 200 + 0.60Yd where (Υd = Y –T) Desirable investment: Ιp = 400 - 560r Government expenditure: G = 250 Taxes: Τ = 50 Real money demand for transactions: 0.5Y Real money demand for speculation: 600 - 2200r Nominal amount of money: M = 1000 Price level: P = 1.25

A. Find the equilibrium in the commodity market (IS curve).
B. Find the balance in the money market (LM curve).
C. To determine algebraically and diagrammatically the income and the equilibrium interest rate of the economy. (Note: Balance income should be estimated using the LM curve function)
D. Suppose that an expansionary monetary policy is pursued, which doubles the nominal amount of money. Find the new income and the equilibrium interest rate of the economy. (Note: the estimate of the new equilibrium income to be made through the function of the LM curve)

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