Consider an economy described by the following:

C̅ = 3.25 trillion 

I̅ = 1.3 trillion

G̅ = 3.5 trillion

T̅ = 3.0 trillion

N̅X̅ = -1.0 trillion

f̅ = 1

mpc = 0.75

d = 0.3

x = 0.1

l = 1

r̅ = 1

a. Derive expressions for the MP curve and AD curve.

b. Assume that π = 1. What is the real interest rate, equilibrium level of output, consumption, planned investment, and net exports?

c. Suppose the Bank of Canada increases r̅ to r̅ = 2 Calculate what happens to the real interest rate, equilibrium level of output, consumption, planned investment, and net exports.

d. Considering that output, consumption, planned investment, and net exports all decreased in part (c), why might the Bank choose to increase r̅ ?