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Using the AD-AS model, describe the effect of the following on output and the price level: {i} a decrease in the rate of income tax (ii) an increase in the price of oil (iii) a depreciation of the domestic currencyr (iv) an increase in interest rates. A Markov jump process has transition probabilities given by P;; (s,(). (i) Stating any assumptions you make, define the transition rates. [2] (ii) Show that the sum of the transition rates out of any state i is zero. [2] (iii) Write down the Chapman-Kolmogorov equations and differentiate to obtain the Kolmogorov forward and backward differential equations. [4] (iv) Explain why the forward and backward equations often more useful than the original transition matrix. [2] [Total 10]