Final answer:
The answer explains how to graph the IS and LM curves, find the equilibrium interest rate and income, and analyze the impact of a change in government purchases. It also explains the concepts of government surplus and deficit.
Step-by-step explanation:
To graph the IS curve, we need to use the given consumption and investment functions and values for government purchases and taxes. The consumption function is given by C=200+0.75(Y-T) and the investment function is I=200-25i. Government purchases and taxes are both 100. We can plot the IS curve by solving for Y at different values of i ranging from 0 to 8. To determine if the government is running a surplus or deficit, we compare government purchases to taxes. If government purchases are higher than taxes, there is a deficit; if taxes are higher, there is a surplus.
To graph the LM curve, we need to use the given money demand function, money supply, and price level. The money demand function is given by (M/P)^d=Y-100i. The money supply M is 1,000 and the price level P is 2. We can plot the LM curve by solving for Y at different values of i ranging from 0 to 8.
To find the equilibrium interest rate and level of income, we need to find the point where the IS and LM curves intersect. At this point, investment equals saving and the money market is in equilibrium. To find the equilibrium interest rate i and level of income Y, we can solve the equations for the IS and LM curves simultaneously.
If government purchases are raised from 100 to 150, the IS curve will shift to the right. To find the new equilibrium interest rate and level of income, we need to solve the new IS and LM curves.