Suppose the MP curve and the IS curves are given as:

MP: r = 1.5 + 0.75

IS: Y = 13 - r.

a. Find the expression for the AD (aggregate demand) curve.

b. Draw three diagrams, one each for the MP, IS, and the AD curves. Label all your diagrams completely.

c. Suppose = 2.00, what are Y and r? Sketch in the values of , Y and r into your three diagrams.

d. Suppose because of economic uncertainty, aggregate autonomous expenditures decrease by 1.00.

i. What is now the equation for the IS curve?

ii. What is now the equation for the AD curve?

iii. What is Y?

iv. Draw the new IS and AD curves into your diagram, and label them clearly and properly and indicate the direction of change by arrow (, ) etc.

e. Suppose the FED decides to maintain Y at the original level, i.e., the level of Y obtained in (c) above:

i. what must the FED do, and what is r for this to happen?

ii. What is now the equation for the MP curve?

iii. Draw the changes into your three diagrams, and indicate the direction of change by arrows (, ).