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  Chirag Pahwa answered this
  

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  a) I = 400 - 40P

  If there is rise in price level, people will spend more money on consumable goods which will leave people with less money to save. Less saving will reduce the overall investment level.

  

  b) Y = C + I + G

  C = 100 + 0.9 * (Y - T) - 20P

  Y = 100 + 0.9 * (Y - T) - 20P + 400 - 40P + 300

  Y = 100 + 0.9 * (Y - 100) - 20P + 400 - 40P + 300

  Y = 800 + 0.9Y - 90 - 60P

  Y = 710 + 0.9Y - 60P

  0.1Y = 710 - 60P

  where P = 1.41 + 0.0001Y

  0.1Y = 710 - 60 * (1.41 + 0.0001Y)

  0.1Y = 710 - 84.6 - 0.006Y

  0.106Y = 625.4

  Y = 5,900

  P at this Y would be: 1.41 + 0.0001 * 5,900 = 2

  Consumption = 100 + 0.9 * (Y - 100) - 20P = 100 + 0.9 * (5,900 - 100) - 20 * 2 = 5,280

  Investment = 400 - 40 * 2 = 320

  c) If new government spending = 400

  Y = C + I + G

  C = 100 + 0.9 * (Y - T) - 20P

  Y = 100 + 0.9 * (Y - T) - 20P + 400 - 40P + 400

  Y = 100 + 0.9 * (Y - 100) - 20P + 400 - 40P + 400

  Y = 900 + 0.9Y - 90 - 60P

  Y = 810 + 0.9Y - 60P

  0.1Y = 810 - 60P

  where P = 1.41 + 0.0001Y

  0.1Y = 810 - 60 * (1.41 + 0.0001Y)

  0.1Y = 810 - 84.6 - 0.006Y

  0.106Y = 725.4

  Y = 6,843.39

  P at this Y would be: 1.41 + 0.0001 * 6,843.39 = 2.09

  Consumption = 100 + 0.9 * (Y - 100) - 20P = 100 + 0.9 * (6,843.39 - 100) - 20 * 2.09 = 6,127.25

  Investment = 400 - 40 * 2.09 = 316.4

  d) If government spending rises, aggregate output will rise. Rise in government spending will raise rate of interest because it will shift the IS curve to its right which will lower the investment level in part (c) than in part (b). Rise in consumption is associate with spending by government on transfer payments, subsidies etc.