Suppose that the consumption function of an economy is
C = 600 + 0.8 Yd
The investment function is 1 = 400-50R, and the government purchase is
G= 200
The money demand function is L = 250+0.5Y - 125R, and the money supply is M0 = 1250,
The price level P is equal to 1. Suppose the government collected a flat tax and maintained a balanced budget,
(1) IS and LM equations.
(2) Equilibrium income and interest rates.
(3) If the income level at full employment is set as Y * =5000, how much more purchases would be needed to achieve full employment by increasing government purchases?
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