(20 points) Consider an economy described by the Following: C = $4.0trillion I = $1.Strillion G = $3.0trillion = $3.0trillion = $1.0trillion f = 0 mpc = 0.8 d = 0.35 x = 0.15 f- = 1% = 0.5 1

a. Calculate an expression for the IS, MP and AD curves

b. Let AS curve be given by the relation: = 6 + 1.5(Y 25.5) (i.e. the price shock p is zero). What are equilibrium values of inflation, output and the real interest rate (, Y, r)?

c. Suppose that government new short. purchases are raised from 3 Trillion to 3.5 trillion. What are short-run equilibrium values of inflation, output and the real interest rate(. Y. r)?Hint: First find the effect of the shock on the LScurve, and then AD curve).

IS curve Y=

AD curve Y=

=

Y =

r=

d. Suppose that a financial crisis begins, and f increases to f = 3. (Assume government purchases are again as in part (a)). What are the new short-run equilibrium values of inflation, output, and the interest rate {, Y, r}?(Hint) First find the effect of the shock on the IS curve, and then AD curve) IS curve Y=

AD curve Y=

=

Y =