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Chapter 22: Q.20 (page 582)

Use an IS curve and an MP curve to derive graphically the AD curve.

Short Answer

Expert verified

AD curve Using IS curve and MP curve .

Step by step solution

01

Concept Preface 

Preface MP wind shows the correlation between the real interest settled by a public bank and the affectedness rate. Shown by ther=r+λπ. advertisement arc shows the total sum of goods and services demanded by the frugality at given prices.IS arc shows the correlation between total fruit and real claim class when the goods demand is in equilibrium.

02

Explanation of Result

The below arc shows the derivative of IS arc. The arc shows that developed real claim classes leads to lower planned investment spending and net expots and hence aggregate affair falls from$10.5trilion to to$10.0trillion to$9.5trillion.

The below MP arc shows that as affectedness rises from1.0to2.0to3.0the real claim class rises from1.5to2.0to2.5.

03

:Explanation of Result 

The figure (3) depicts the degree of equilibrium fruit corresponding to each of the three affectedness rates the lines that connects these points is the Announcement arc and it's bowed slopping.

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Most popular questions from this chapter

Consider an economy described by the following:

C=\(4trillionI=\)1.5trillionG=\(3.0trillionT=\)3.0trillionNX=$1.0trillionf=0mpc=0.8d=0.35x=0.15λ=0.5r=2

(a) Derive expressions for the MP curve and the AD curve.

(b) Calculate the real interest rate and aggregate output whenπ=2andπ=4

(c) Draw a graph of the MP curve and the AD curve, labeling the points given in part (b).

Suppose the MP curve is given by r = 2 + p, and the IS curve is given by Y = 20 - 2r.

a. Derive an expression for the AD curve, and draw a

graph labeling points at p = 0, p = 4, and p = 8.

b. Suppose that l increases to l = 2. Derive an expression

for the new AD curve, and draw the new AD

curve using the graph from part (a).

c. What does your answer to part (b) imply about the

relationship between a central bank’s distaste for

inflation and the slope of the AD curve?

Suppose the monetary policy curve is given by r=1.5+0.75π, and the IS curve is given by Y=13-r.

a. Calculate an expression for the aggregate demand curve.

b. Calculate the real interest rate and aggregate output when the inflation rate is 2%, 3%, and 4%.

c. Draw graphs of the IS, MP, and AD curves, labeling the points from part (b) on the appropriate graphs.

Consider an economy described by the following:

C = \(4 trillion

I = \)1.5 trillion

Consider the economy described in Applied Problem 23.

a. Derive expressions for the MP curve and the AD curve.

b. Assume that π=2. What are the real interest rate and the equilibrium level of output?

c. Suppose government spending increases to $4 trillion. What happens to equilibrium output?

d. If the Fed wants to keep output constant, then what monetary policy change should it make?
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