Question

Assume that the economy is characterized by the following equations:

Derive the IS, LM equations. Calculate the equilibrium Y and r.

If = 14000, is the economy in recession or expansion? If the objective of policymakers is to keep the economy at its natural output level and have a balanced budget, which combination of policies would be needed? Illustrate and explain.

C=1000+0.6(Y-T)

T=1500

G=2000

I=1100-100r

L(r,Y)=1000+0.5Y-500r

M(s)=12000

P=2