Question 1: Consider an economy described by the following data:

C = $3.25 trillion

I = $1.3 trillion

G = $3.5 trillion

T = $3.0 trillion

NX = - $1.0 trillion

f = 1

mpc = 0.75

d = 0.3

x = 0.1

a. Derive simplified expressions for the consumption function, the investment

function, and the net export function.

b. Derive an expression for the IS curve.

c. If the real interest rate is r = 2, what is equilibrium output? If r = 5, what is

equilibrium output?

d. Draw a graph of the IS curve showing the answers from part (c) above.

e. If government purchases increase to $4.2 trillion, what will happen to equilibrium

output at r = 2? What will happen to equilibrium output at r = 5? Show the effect

of the increase in government purchases in your graph from part