Task 3Consider a closed economy where the goods and money markets are described by the followingrelationships:C = 200 + 0.9(Y – T)I= 400 – 15rM/P = 200 + Y – 100rG = 150T = 100M = 2000 P|=2Where Cis planned consumption, I is planned investment spending, T is government tax revenues, Gis government purchases, M is the money supply, P is the price level and r is the interest rate.c) The government reduces taxation to T=50 in order to boost economic activity. Assume nochanges in The values of all the other variables.1. What is the immediate increase in income before the economy adjusts to its newequilibrium?2. What are the economy's equilibrium level of output Y and interest rate following thecut in taxation? Compute the equilibrium level of consumption and investmentspending. With the help of the IS/LM graph, carefully explain what happens to theeconomy following the cut in taxation.d)lf the government intends to pursue monetary policy instead of fiscal policy in order to achieve thesame level of output that you computed in c.2), how much should money supply change by? Usegraphs to show the change in the economy and explain very carefully the monetary transmissionmechanism.

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Consider a closed economy where the goods and money markets are described by the following relationships:

Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781305971509

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter21: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section: Chapter Questions

Problem 5CQQ

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