Consider an economy described by the following data:

C = $4 trillion

I = $1.5 trillion

G = $3.0 trillion

T = $3.0 trillion

NX = $1.0 trillion

f = 0

mpc = 0.8

d = 0.35

x = 0.15

a. Derive an expression for the IS curve.

b. Assume that the Federal Reserve controls the interest rate and sets the

interest rate at r = 4. What is the equilibrium level of output?

c. Suppose that a financial crisis begins, and f increases to f = 3. What will

happen to equilibrium output? If the Federal Reserve can set the interest rate,

then at what level should the interest rate be set to keep output from

changing?