Question: Consider the following Curves: MP-Curve: r = 1.0+ 0.5 * T IS-Curve: Y = 12 - 0.5 * r AS-Curve: = 2.0+ 0.75* (Y-

Consider the following Curves: • MP-Curve: r = 1.0 + 0.5 * tt • IS-Curve: Y = 12 -0.5*r • AS-Curve: n = 2.0 + 0.75* (Y – 13.5

Consider the following Curves: MP-Curve: r = 1.0+ 0.5 * T IS-Curve: Y = 12 - 0.5 * r AS-Curve: = 2.0+ 0.75* (Y- 13.5) Note by the absence of any supply shocks so far (i.e. in the above AS-Curve p = 0 at first). Part a) Calculate the initial equilibrium. Is this a stable equilibrium? (Hint: look at the value for ) Part b) Now consider a negative supply shock, i.e. suddenly p = -1.5. What is the new equilibrium?

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