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(a) Derive the AD curve from IS-LM. Explain in words. [3 marks] (b) Show using the AD-SRAS-LRAS curves what happens to real interest rate, output

(a) Derive the AD curve from IS-LM. Explain in words. [3 marks]

(b) Show using the AD-SRAS-LRAS curves what happens to real interest rate, output and prices in the short-run and the long-run if there is a temporary increase in government purchases for military purposes. Will it matter whether the temporary increase in military spending is funded by taxes or by borrowing? [2 marks]

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