Question 1: Consider an economy described by the following: (15 marks)

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

= 0.5

r (autonomous) = 2

a) Derive expressions for the MP curve and the AD curve.

b) Calculate the real interest rate and aggregate output when = 2 and = 4.

c) Draw a graph of the MP curve and the AD curve, labeling the points given in part (b).