Assume the following model of the economy, with the price level fixed at 1.0:

\begin{array} { l l } C = 0.8 ( Y - T ) & T = 1,000 \\I = 800 - 20 r & G = 1,000 \\Y = C + I + G & M / P = M / P = 0.4 Y - 40 r \\M = 1,200 &\end{array}

a. Write a numerical formul a for the

I S

curve, showing

Y

as a function of

r

alone. (Hint: Substitute out

C , L , G

, and

T

.)
b. Write a numerical formula for the

L M

curve, showing

Y

as a function of

r

alone. (Hint: Substitute out

M A P

.)
c. What are the short-tun equilibrium values of

Y , r , Y - T , C , I

, private saving, public saving, and nati onal saving? Check by ensuring that

C + I + G = Y

and national saving equals

l

.
d. Assume that

G

increases by 200 . By how much will

Y

increase in short-tun equilibrium? What is the government-purchases multiplier (the change in

Y

divided by the change in

G

)?
e. Assume that

G

is back at its original level of 1,000 , but

M M ^ { 5 }

(the money supply) increases by 200. By how much will

Y

increase in short-run equilibrium? What is the multiplier for money supply (the change in

Y

divided by the change in

M F

An Increase in Taxes Lowers Income

Multiple Choice