Economic

1. Use the following information for this problem:

1 Goods Market:

C = 3+0.5(Y-T)

I = 17-50r T = 10

G=5

Asset Market: MS = 25/P; assume that the P=1 initially

MD = Y - 50r

1. Numerically solve for the initial general equilibrium interest rate, output, and price? Assuming the economy is a closed economy what is the desired level of savings, investment, and net exports for the economy?

2. Suppose that an economy is faced with an adverse investment shock (decrease in investment). Show graphically (hand drawn only) under the Keynesian assumptions what happens in the SR and the LR. Include both the IS/LM/FE and the AD/AS models making sure to completely label the graphs.

3. Suppose that when the economy is in the Short Run equilibrium (hand draw a new graph starting at the Short Run) the Federal Reserve wants to conduct a stabilization policy. What is the policy they would use called? Show graphically how they would stabilize.

4. Suppose that when the economy is in the Short Run equilibrium (hand draw a new graph starting at the Short Run) the Government wants to conduct a stabilization policy. What are the 3 types of policy they can conduct? What are the pros and cons of these policies? Show graphically how they would stabilize.