Consider an economy described by the following:

C̅ = $4 trillion

I̅ = $1.5 trillion

G̅ = $3.0 trillion

T̅ = $3.0 trillion

N̅X̅ = $1.0 trillion

f̅ = 0

mpc = 0.8

d = 0.35

x = 0.15

a. Calculate an expression for the IS curve.

b. Assume that the central bank controls the interest rate and sets the interest rate at r = 4. What is the equilibrium level of output?

c. Suppose that a financial crisis begins, and f increases to f = 3. What will happen to equilibrium output? If the central bank can set the interest rate, then what should the interest rate be set at to keep output from changing?

d. Suppose that as a result of the financial crisis, in addition to f increasing as in part (c), planned autonomous investment decreases to I = $1.1 trillion. Will the change in the interest rate by the central bank from part (c) be effective at stabilizing output? If not, what additional monetary or fiscal policy changes could be implemented to stabilize output at the original equilibrium output level in part ( b)?