3. Using the following information about the current
C = 130 + 0.80(Y-T) where: C: consumption, Y: output
I = 680 -1200r T: taxes, I: Investment, r: real interest rate
T = 70 G: government
G = 110
(M/P) d = 0.6Y – 960r where: (M/P) d : money demand
Ms = 2364 Ms: money supply
P = 1.0 P: price level
(You must show the steps to derive these answers.)
a. Derive the equation for the IS curve for this economy.
b. Derive the equation for the LM curve for this economy.
c. Using (a) and (b), determine the equilibrium r and Y for this economy.
d. Suppose government decides to increases taxes by 10 so that now T=108. Derive the
new relevant equation(s), and determine the new equilibrium r and Y.
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