Assume that an economy is described by the IS curve Y = 3,600 + 3G – 2T – 150r and the LM curve Y = 2 M/P + 100r [or r = 0.01Y – 0.02(M/P)]. The investment function for this economy is 1,000 – 50r....

Assume that an economy is described by the IS curve Y = 3,600 + 3G – 2T – 150r and the LM curve Y = 2 M/P + 100r [or r = 0.01Y – 0.02(M/P)]. The investment function for this economy is 1,000 – 50r. The consumption function is C = 200 + (2/3)(Y – T). Long-run equilibrium output for this economy is 4,000. The price level is 1.0 and M = 1,200. a. Assume that government spending is fixed at 1,200. The government wants to achieve a level of investment equal to 900 and also achieve Y = 4,000. What level of r is needed for I = 900? What levels of T and M must be set to achieve the two goals? What will be the levels of private saving, public saving, and national saving? (Hint: Check C + I + G = Y.) b. Now assume that the government wants to cut taxes to 1,000. With G set at 1,200, what will the interest rate be at Y = 4,000? What must be the value of M? What will I be? What will be the levels of private, public, and national saving? (Hint: Check C + I + G = Y.)