Consider a simple economy described by:

A = C + I + G + X - M

C = 1000 + 0.5Y – 200i

I = 14000 + 0.2Y– 200i

G = 1200 - 0.1Y

X = 2000

M= 1000 -.05Y

Y = A

L = 0.33Y – 25i

(M/P) = 3000

L = (M/P)

Derive the IS equation from the above model.

Derive the LM equation from the above model.

Derive the equilibrium levels of Income Y and Interest Rate i.

What is Investment spending if the interest rate is at the equilibrium level?

If the government increases spending G by 100:

i. What would the new IS Curve look like?

ii. What would the new LM curve look like?

iii. What would the new equilibrium income Y and Interest I be?

iv. At this new equilibrium, what would the level of Investment spending be?