Desired consumption is Cd = 100 + 0.8Y - 500r - 0.5G, and desired investment is Id = 10 - 500r. Real money demand is Md/P = Y - 2000i. Other variables are πe = 0.05, G = 200, = 1000, and M = 2100.
1. Identify the equilibrium values of the real interest rate, investment, consumption and the price level.
2. Assume the money supply increases to 2800. Identify the equilibrium values of the real interest rate, investment, consumption, and the price level. Suppose that the expected inflation rate is unchanged.
3. Use the IS-LM model to determine the effects on the general equilibrium values of the real wage, employment, output, the real interest rate, investment, consumption, and the price level. Tougher immigration laws reduce the working-age population. Sketch the graph and explain in words.