In Country A the economy can be described in a series of multiple equations, where the 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.
(a) Find the equilibrium values of the real interest rate, consumption, investment, and the price level for CountryA.
(b) Suppose that the Central Bank of CountryA decides to increase the money supply to 2800. Find the new equilibrium values of the real interest rate, consumption, investment, and the price level. (Assume that the expected inflation rate is unchanged.)
(c) Assume that the government of CountryA is worried that their native-born citizens are losing their jobs to immigrants. Therefore, the government passes tougher immigration laws that reduce the working-age population. Use the IS-LM model to determine the effects on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the price level. For full credit you must draw the graph and explain in words.