IS Function

C=600 + (.7)(1-t)Y

t=.15

I=1500-75(i)

I=6(6%)

G=1000

LM Function

L=.3 Y-65(i)

M/P=900

a. What is the equilibrium income level and interest rate

b. Suppose there is an increase in t from .15 to .20. What will be the change in the equilibrium level of income and interest rate?

c. Suppose there is a decrease in government expenditures (G) from 1000 to 800 what will be the change in the equilibrium, income level and interest rate?

d. Suppose there is an increase in the money supply from 900 to 1200 what will be the change in the equilibrium level on income and interest rate?

e. Today Congress and the President are debating the correct economic policy to raise the debt limit by trying to balance the budget. Here are 3 proposals:

i Cut government expenditures (G) while keeping taxes fixed

ii Increase the tax rate t while keeping government spending G fixed

iii Increase the tax rate t and decrease government spending G

Given your answers in a-e above what policy would you support be implemented. Explain