The demand for money comes from three sources: transactions, precautions and speculations. The transactions demand is used for the daily exchange of goods and services, whereas the precautionary demand is used to fund any emergencies requiring unforeseen expenditure. Both are assumed to be proportional to national income. The speculative demand for money is used as a reserve fund in case individuals or firms decide to invest in alternative assets such as government bonds and other investments, and depends on the interest rate, r. The total demand for money, MD​, is the sum of the transaction, precautionary and speculative demands. The money market is said to be in equilibrium when the supply of money, MS​, matches the demand for money, MD​ : MS​=MD​ Consider a two-sector economy. Firstly, the commodity market is in equilibrium when Y=C+I where Y is the income, C is the consumption C=48+0.8Y and I is investment I=98−75r This is known as the IS schedule. Secondly, in the money market the supply of money is MS​=250 and the total demand for money is MD​=0.3Y+52−150r This is known as the LM schedule. (a) Calculate the two equilibria, income Y∗, and interest rate, r∗, by using the two equilibrium conditions, Y=C+I, for the IS schedule and MS​=MD​, for the LM schedule. 10 marks (b) Plot the IS and LM lines with Y as the vertical axis and r as the horizontal axis and identify the equilibria. Use the range, 0.00-0.10 for r (increments of 0.01).