Deep thoughts about the AD curve The equations characterizing the

demand side in the New Keynesian (and Neoclassical for that matter) are

Ct = C^(d)(Yt Gt, Yt+1 Gt+1, rt)

It = I^(d)(rt, At+1, Kt)

Yt = Ct + It + Gt

Mt = PtM^(d)(rt + ^(e)t+1, Yt)

(a) Which equations summarize the IS curve?

(b) Under our standard assumptions, how are consumption and investment

affected by changes in the interest rate?

(c) Suppose consumption and investment are very sensitive to changes in

the interest rate. How will this affect the slope of the IS curve? What is

the economic intuition? Derive the AD curve in this case.

(d) Now suppose neither consumption nor investment are affected by changes

to the interest rate. Show how will this affect the slope of the IS curve

and explain the economic intuition. Derive the AD curve in this case

and discuss how the slope is different than in part c.