Question 5 10 pts Suppose that the economy is described as follows, where i is the rate of inflation: C = 100 - 40m I - 500 - 107 G - 500 X - 300 - 57 M - 100 - 57 Questions 5.1 Write down an equation for aggregate demand as a function of the rate of inflation. [1 mark] 5.2 Provide three reasons for why aggregate demand decreases when inflation increases. For each explanation, discuss which components of AD are implicated. [3 marks] 5.3 Assume the marginal propensity to consume is 0.6 and government spending increases by 200. Write down the new aggregate demand function and explain in words why this is the answer. Ignore any crowding out effects. [3 marks] 5.4 If instead of direct spending, the government lowered taxes by 200, would you expect the shift in aggregate demand to be smaller, larger or the same? Briefly explain your reasoning (you don't need to do any calculations) [1 mark] 5.5 Explain what the crowding out effect is. How might your answer to 5.3 change if you took this into account? [2 marks] Clearly label each of your answers in the text box below. Tools Table