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Part 2: Questions from the Instructor 1. The following equations describe the macro-economy: Consumption function: C = 50 + 0.5 (Y-T) Government spending: G = 100 Real Money supply: M/P 100 Real Money demand: Md/P-2Y-20000/ Taxes: T 0.2Y Investment: 200- 10000i Notice that taxes are no longer fixed: they are proportional to the amount of income. a) Derive the IS and LM curves. b) Calculate the equilibrium output and interest rate. c) At the equilibrium, is the government having a budget surplus, budget deficit, or balanced budget? d) If the interest rate is 0.02 and output is 300, is the economy in equilibrium? Do we have excess demand or supply in the goods market? Do we have excess demand or supply in the money market? Explain your answers. e) Suppose the government wants to adjust the tax rate from 0.2 to another level in order to change output to 260 What should that new tax rate be? Show your steps clearly.
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