and Policy Analysis Questions (28 points total) Instructions: Write your final numerical answer in the corresponding answer box. 1 . (20 points) Consider an economy described by the following: C = $4.Otrillion I = $1.5trillion G = $3.0trillion T = $3.0trillion NX = $1.0trillion f = 0 mpc = 0.8 d = 0.35 x = 0.15 T = 1% 1 = 0.5 a. Calculate an expression for the IS, MP and AD curves MP curve 1= IS curve Y= AD curve Y= b. Let AS curve be given by the relation: 1 = 6 + 1.5(Y - 25.5) (i.e. the price shock pis zero). What are equilibrium values of inflation, output and the real interest rate {n, Y, r}? 3 8 6 . Y 2.1,5 TT = Y= 1= 53. 5 3 C. Suppose that government purchases are raised from $1.0- trillion to $1 5 trillion. What are new short-run equilibrium values of inflation, output and the real interest rate{n, Y, r}? (Hint: First find the effect of the shock on the IS curve, and then AD curve). IS curve Y= AD curve Y= T = Y= 1= d. Suppose that a financial crisis begins, and f increases tof = 3. (Assume government purchases are again as in part (a)). What are the new short-run equilibrium values of inflation, output, and the interest rate {n, Y, r}? (Hint: First find the effect of the shock on the IS curve, and then AD curve) IS curve Y= AD curve Y= TI = Y=