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
λ	= 1
r̅	= 1

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

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

c.  Suppose the Fed increases r̅  to r̅ = 2. Calculate the real interest rate, the equilibrium level of output, consumption, planned investment, and net exports at this new level of r̅.

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