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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 3 C-C0+C10Y-T) I-b0+b1Y-b2i i-i Calculate the equilibrium level of output. Now, assume that bl+cl=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 IS curve. (10 points)
