I need help especially with B-D, thank you! This is for a intermediate Macro class.
1. (IS-LM and Aggregate Demand] Consider the equation FY = MV which essentially implies that every transaction in the economy must be paid with money. Money velocitycan in turn be written as a function of the nominal interest rate V = LE}. a] Assume L(i} = 23′ and E [if] = U. derive the money demand equation with r as a func-tion of Y, M and P. {Hint: what is the relation between T and 3′). Assume money supply is fixed at a level 111, make a graph with ‘r on the Y-axis and M on the X—axis showing theequilibrium values of r and M. b) Let investment and consumption be fiven respectively by HT) 2 f — mi" and C =C + ng. p; L“? U and 1 2} pg 2:? 0. Government expenditure G is exogenously determined.Find the IS curve by expressing “r as a function of Y (Hint: Use the aggregate resourceconstraint for this economy). Combine the IS and LM curves to find the equilibrium values of r and Y. Make a graph with both the IS—LM curves, label the slopes and the equilibriumvalues. In the IS—LM model we are assuming an economy in the short run with fixed prices (theslope of the LM curve changes when prices change). c} Combine the IS and LM curves to express P as a function of Y. This is the ADequation. Consider the short-run case where prices are completely fixed at a level P. Makea graph with the AD, SEAS and LRAS curves assuming the economy is in a long-run equi-librium. [1} Assume the government increases expenditure by AG funded through a deficit. Show graphically the effect on P, Y and 1" using both the AD—AS and IS-LM models. Computethe changes in Y and r.
