Analyzing IS-LM equations.
Consider the LM and IS functions.
a. Determine the equilibrium level of income and the interest rate. Show your work
b. Illustrate what would happen to the interest rate and level of income if the government increases its purchases by 10%. Consider each one of the three scenarios below (show your work):
b.1. The FED does nothing.
b.2. The FED keeps the interest rate constant
b.3. The FED keeps the income constant.