QUESTION 1 (3,000 pts)

Suppose the Petrick-Havlicek economy can be described by the following equations and values:

C"" = 200,I " "= 240,G""= 145,T"" = 160,NX" "= 100

mpc = 0.75,c = 5,d = 30,x = 15

(M/P)^d = 0.5Y - 10,000r ; (M/P)^s = 800 , and the nominal money supply is 1,600.

a)(1,000 pts) Solve for the equation for the AD curve, and then neatly sketch this curve below (call it AD₁).

i.Be sure to label the diagram fully and

ii.Depict the point on AD₁ where the Petrick-Havlicek economy is currently operating. (Consider this as point A)

b)(1,000 pts) Choose one monetary policy to implement in this economy.

i.State your monetary policy of choice.

ii.State the goal of this monetary policy.

iii.Solve for the new equation for the AD curve (call it AD₂).

iv.Neatly sketch AD₂ on your diagram above (on page 2).

c)(1,000 pts) Choose one fiscal policy to implement in this economy. (Make sure to ignore your calculation from part b of this question)

i.State your fiscal policy of choice.

ii.State the goal of this fiscal policy.

iii.Solve for the new equation for the AD curve (call it AD₃).

iv.Neatly sketch AD₃ on your diagram above (on page 4).