Given the money demand and spending components, calculation of equilibrium income and ineterest rate.
This problem will examine the effects of fiscal policy whaen money demand depends directly on disposable income in a closed economy. Assume the following:
Find R as a function of Y - T. describe in words what happens to the interest rate when the government increases taxes holding everything else fixed.
a.Using your result above, find out equilibrium output Y.
b. Illustrate what is the multiplier on government spending? Tax cuts?
c.Utilizing the facts above, find equilibrium output when the government cuts taxes to 50.
d.describe in words the differences in results between this setup and the standard model where money demand does not depend on disposable income.