a

a. Graphically derive the IS curve from the goods market equilibrium. Hint: start from equilibrium in goods market and the analyze the effect of a change in interest rate i on Y. (10 points)

b. Let the following equations characterize the economy: Z=C+I+G C=C0+C1(Y-T) I=b0+b1Y-b2i i=i* Calculate the equilibrium level of output. Now, assume that b1+c1=0.5. Calculate the effect on output of a €100 000 increase in public education expenditures (15 points)

c. Explain in detail and show on a graph the effect of such an increase in public education expenditures on: (1) the LM curve; and (2) the