Question

Consider the following short-run, open economy model of the economy. Goods Market C = 100 +...

Consider the following short-run, open economy model of the economy.

Goods Market

C = 100 + 0.9(Y − T) I = 50 − 7.5r; NX = −50 G = 200; T = 100

Money Market

M = 4,000 P = 10 L(r, Y) = Y − 350r

a. (4 pts) Derive the IS and LM equations and put them on a graph with the real interest rate (r) on the vertical axis and real GDP (Y) on the horizontal axis. And find the equilibrium values of r and Y.

b. (3 pts) What is the value of the Keynesian-cross tax multiplier? Policymakers wish to shift the IS curve to the left by 450. How much do they need to raise taxes to do so? What are the resulting equilibrium values of r and Y?

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