91Ó°ÊÓ

$$\begin{gathered} \overline{C}=\$3.25trillion \\ \overline{I}=\$1.3trillion \\ \overline{G}=\$3.5trillion \\ \overline{T}=\$3.0trillion \\ \overline{NX}=-\$1.0trillion \\ \overline{f}=1 \\ mpc=0.75 \\ d=0.3 \\ x=0.1 \\ l=1 \\ \overline{r}=1 \end{gathered}$$

(a) The MP curve shows the different points at which the money market is in equilbrium. The MP curve can be expressed as,

$$\begin{gathered} r+\mathrm{π}=+\mathrm{π}+\mathrm{θ}×(\mathrm{π}–\mathrm{π}*) \\ r=\overline{r}+\mathrm{θ}×(\mathrm{π}–\mathrm{π}*) \\ r=0.02+(\mathrm{π}–0.01) \\ r=0.01+\mathrm{π} \end{gathered}$$

The IS curve can be expressed as,

$$\begin{gathered} Y=C+I+\overline{G}+NX: \\ Y=1+0.75×Y+1–30×r+3.5–1–10×r \\ 0.25×Y=4.5–40×r \\ Y=18–160×r \end{gathered}$$

Combining the above two equations can give the expression for the aggregate demand curve,

$$\begin{gathered} Y=18–160×(0.01+\mathrm{π}) \\ Y=18–1.6–160×\mathrm{π} \\ Y=16.4–160×\mathrm{π} \end{gathered}$$

From the AD curve,

$$\begin{gathered} Y=16.4–160×\mathrm{π} \\ Y=16.4–160×0.02 \\ Y=16.4–3.2 \\ Y=13.2 \end{gathered}$$

From the MP curve

$$\begin{gathered} r=0.01+\mathrm{Ï€} \\ r=0.01+0.02 \\ r=0.03 \end{gathered}$$

Using the equation for IS curve,

$$\begin{gathered} Y=C+I+\overline{G}+NX: \\ Y=1+0.75Y+1–30r+4–1–10r \\ 0.25Y=5–40r \\ Y=20–160r \end{gathered}$$

If the central bank wants to keep the output level constant, it should adopt a contractionary monetary policy. This would reduce money supply and this inflatioary pressure.