1 The New Keynesian Model: IS-LM-AD (Modified Exercise 1 from GLS Ch24 on page 532-533) Suppose the demand side of the economy is characterized by Equations (1) to (5) as follows: Ct = C (Yt - Gt, Yt+1 - Gt+1, rt) (1) It = 1(rt, At+1, Kt) (2) Yt = C+ + + Gt (3) Mt = PM( n + mi+1, Yi) (4 ) It = it - "itl (5) (a) Graphically derive the LM curve. (b) Describe what the LM curve describes and how the money market differs between the New Keynesian and Neoclassical models. (c) Graphically derive the AD curve and describe what the AD curve describes. (d) Suppose Equation (1) is replaced by Equation (6): Ct = C (Yt - Gt, Yt+1 - Gt+1) (6) Every other equation remains the same. Graphically derive the new AD curve. (e) Does an increase in money supply shift the AD curve by more in part (c) or part (d)? (f) Assume Equations (1) - (5) characterize the economy, but Equation (4) is replaced by Equa- tion (7) MI = PIM(Y) (7) Graphically derive the LM and AD curves. (g) Assume Equations (1) - (5) characterize the economy, but Equation (4) is replaced by Equa- tion (8) Mt = PM(rt + #f+1) (8) Graphically derive the LM and AD curves. (h) Does an expansion of the IS curve shift the AD curve by more in part (f) or part (g)? (i) At the beginning of the COVID-19 pandemic, the Canadian government implemented two measures: sending cheques to citizens to keep them home and spending on vaccine pur- chases. Both measures aimed to reduce virus transmission. Assuming the Canadian econ- omy is characterized by Equations (1) to (5), how do these two measures impact demand in the economy? Explain with both graphs and words