2. Suppose MP is described by the reaction function r = +(-) + y (Y ). (a) Derive the AD curve in terms of deviations from the inflation target . (b) How does y affect the slope of the AD curve? (c) Compare the effects of the reaction coefficiencts and %- 3. Consider the following two-period economy. There are two households i = 1,2, both having an endowment of y = 1 each period and preferences given by (c1, c2) = lnci + (++) In cz where p