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Assume that the economy is characterized by the following equations: C = 1000 + 0.6 (Y-T)...

Assume that the economy is characterized by the following equations:

C = 1000 + 0.6 (Y-T)

T = 1500

G = 2000

I= 1100 - 100r

L (r,Y) = 1000 + 0.5y - 500r

Ms = 12000

P = 2

Derive the IS, LM equations. Calculate the equilibrium Y and r. If =14000, is the economy in recession or expansion? If the objective of policymakers is to keep the economy at its natural output level and have a balanced budget, which combination of policies would be needed? Illustrate and explain.

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