Consider an economy described by the following:

C̅ = $3.25 trillion

I̅ = $1.3 trillion

G̅ = $3.5 trillion

T̅ = $3.0 trillion

N̅X̅ = -$1.0 trillion

f̅ = 1

mpc = 0.75

d = 0.3

x = 0.1

a. Calculate simplified expressions for the consumption function, investment function, and net export function.

b. Calculate an expression for the IS curve.

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

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

e. If government purchases increases to $4.2 trillion, what will happen to equilibrium output at r = 2? What happens to equilibrium output at r = 5? Show the effect of the increase in government purchases in your graph from part (d).