1.Consider an economy described by thefollowing.

G =

Aggregate Demand = AE^planned= C + I^planned+ G + NX

Monetary policy (MP) curve and takes the form:

= 3.25 trillionI= 1.3 trillion= 3.5 trillion

= 3.0 trillion

=-1.0 trillion

= 1%

mpc= 0.75

d= 0.3 (trillion per 1%change)

x= 0.1 (trillion per 1%change)

= 1

r=1%

a.Derive expressions for the MP curve and ADcurve.

MP curve:r =____________ + ___________

AD curve: AD = _____________ + ____________ r + ________________ Y

b.Find the income expenditure equilibrium.

IE equilibrium: Y* = ___________ + ____________ r

c.Assume that =1%. What is the real interest rate, equilibrium rate of output, consumption, planned investment, and netexports?

r = __________

Y = __________

C = __________

I^planned= __________

NX = __________

d.Suppose the Fed increasesrtor= 2%. Calculate what happens to the real interest rate, equilibrium level of output, consumption, planned investment and netexports.

r = __________

Y = __________

C = __________

I^planned= __________

NX = __________