Consider a model for goods market C=300+5/20Y, I=60+6/20Y-500i and assumethe financial market equilibrium is given by M-P=-80+0.1Y-1000i(a)solve for the IS curve by expressing the equilibrium level of output as a function of government spending G, and the interest rate i.(b)solve for the aggregate demand relationship between output,government spending,level of the money stock and the level of prices.(c)using the IS-LM framework,assume that prices are fixed,P=100,that M=100 and that G=50.Solve for the equilibrium level of output and the interest rate.(d)The government is unhappy with the equilibrium level of output and wants to increase it to Y=1000 using monetary policy.What is the required change in the level of money stock M?Why such a policy is unfeasible?(e)The government is unhappy with the equilibrium level of output and wants to increase it to Y=1000 using fiscal policy.What is the required change in the level of government spending G?(f)Compare your answers to(h) with your answer to (c) and explain.
