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Advanced Macroeconoics II (41-434) Assignment 1 1. Consider the following IS/LM Model discussed in the class (IS) (LM) rn-p-y-Ai, λ > 0. where π is a expected inflation, g is a government spending, and m is money supply, respec tively. It is assumed that price level is fixed as p-p A. Calculate the equilibriu interest rate and output level. B. Assume that g is constant. Calculate the effect of the change in the money supply on the equilibrium interest rate and output level. C. Assume that m is constant. Calculate the effect of the change in the government spending on the equilibrium interest rate and output level. D. It is now assumed that price is not fixed any more, and is exogenously given. Derive AD curve. What does it look like?
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