Consider the following economy: Planned consumption: ? = 900 + 0.5(? − ?) − 180? Planned investment: ? = 950 − 180? Real money demand: ( ? ? ) ? = 0.5? − 180?
a. (2 pts) Suppose ? = 400, ? = 450, and ? = 9,750. Find an equation for the IS curve.
b. (2 pts) Find an equation for the LM curve.
c. (2 pts) Find an equation for the aggregate demand curve. Express the AD curve as ? being a function of ?. (Hint: Use the IS and LM equations to find a relationship between ? and ?.)
d. (5 pts) If the full employment output ? = 4,000, what are the equilibrium values for the level of aggregate prices, output, consumption, investment, and the real interest rate?
e. (2 pts) Suppose that the money supply falls to ? = 5,250. What is the equation for the AD now?
f. (5 pts) Repeat (d) given that money supply falls to 5,250
g. (3 pts) Explain what you find using the IS-LM diagram, and the LRAS curves drawn in the ? − ? space. Argue whether IS, LM shifted or not and why
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