A) IS curve:
Y = C + I + G + (X - M)
Y = (400 + 0.5Yd) + (700 - 4000r + 0.1Y) + 200 + 0
Y = 400 + 0.5(Y - TP) + 700 - 4000r + 0.1Y + 200
Y = 400 + 0.5Y - 0.5(-200) + 700 -4000r + 0.1Y + 200
Y = 0.5Y + 0.1Y + 400 - 100 + 700 + 200 - 4000r
Y - 0.5Y - 0.1Y = 1200 - 4000r
0.4Y = 1200 - 4000r
Rearranging:
4000r = 1200 - 0.4Y
Solving for r gives us the equation of the IS curve:
r = 0.3 - ...

Solution Summary

This solution shows how to find the equations of the IS and LM curves and how to use them to find equilibrium output (Y), interest rate (r), consumption (C), and investment (I). Then the equilibrium is recalculated if government spending (Q) increases.

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