1.Drive the AD (Aggregate Demand) curve using the following: IS curve is given as Y = 2005-100i, LM₁ is Y= 1000+25i (when P = 1) and LM₂ is Y= 500+25i (when P =2), Show the derivation in (interest rate-income) and (price level-income) spaces. (You may insert a snapshot of the graphs if drawn manually). (5 marks)

2.Suppose the IS curve is Y = 3905-100i and Y = 1500 + 250i is the LM curve, Using these compute:

a)The equilibrium interest rate and output (i*and Y*).

b)If government spending was increased by 100m with an immediate impact elasticity of 2.5 in the goods market, determine new income and interest rate.

c)Determine the impact of the above policy on private investment if it is known that di/dA = 05/100

d)Determine the magnitude of the change in money supply required to eliminate any crowding out effect in (c) above. Suppose di/dMs = -0.15

e)Explain the dynamics represented in (a-d) using an IS-LM space. (You may insert a snapshot of the graph if drawn manually).

Show using the IS-LM graph the impact of an expansionary fiscal policy if the LM curve is vertical. If you were the Economic Planner in this country, how would you implement the fiscal policy without causing any crowding out of private investment? (You may insert a snapshot of the graph if drawn manually)