I = b.1412? MD = a\

1 MD co+c1Y, bobli, do dlY-9and The domestic and foreign price lewls are both equal to one (P = = 1), so the nominal and real exchange rates are also equal. Money supply and the expected exe,hnnge rate are also equal to one: MS = 1 and Ee = 1. Assume T = O and G > O. (a) Derive the equation of the IS curve. (2 points) (b) Derive the equation of the LM curve. (2 points) (c) Derive an algebraic expression for equilibrium output. (10 points) (d) To simplify notation, let k be the multiplier in part (c). Suppose the government increases its c.zpenditure by AG. Deriw c..pressions for changes in output (AY), consumption (AC), investment (A1)and net exports (AN X). (8 points) (e) Because Y = C + I + G + NX, use your derivations in part (d) to verify that AY = AC + A1 + AG + AN X. (4 points)