Consider the following economy:
C = 300+0.8(Y-T) I = 2,000-200r
L(r,Y -T) = (Y -T)/r M = 1,000
P = 12 T = 500 G = 600
a. What is the equilibrium interest rate?
b. What happens to the equilibrium interest rate if the taxes increase to 600? Il- lustrate the impact of such policy on IS, LM, and AD curves?
c. If the Fed wishes to raise the interest rate at the level found in part a, what money supply should it set in response to the policy described in part b?