Suppose the MP curve is given by r = 2 + , and the IS curve is
Question:
Suppose the MP curve is given by r = 2 + π, and the IS curve is given by Y = 20 − 2r.
a. Derive an expression for the AD curve, and draw a graph labelling points at π = 0, π = 4, and π = 8.
b. Suppose that λ increases to λ = 2.
Derive an expression for the new AD curve, and draw the new AD curve using the graph from part (a).
What does your answer to part
(b) imply about the relationship between a central bank’s distaste for inflation and the slope of the AD curve?
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Related Book For 
The Economics Of Money, Banking And Financial Markets, Seventh Canadian
ISBN: 9780226531922
7th Canadian Edition
Authors: Frederic S. Mishkin
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