Question

4. (9 points) Consider the following short-run model with the simple monetary policy rule. IS curve: Y = ā- 5(Rt - F) Monetary policy rule: Rt - r = m(Tit - ) Phillips curve: 77 = 7-1 + DÝ+7 (a) Derive the aggregate demand (AD) curve. (b) Explain why the AD curve slopes downward. (c) If í becomes larger while all other parameters stay the same, how does the AD curve change? (d) Derive the aggregate supply (AS) curve. (e) Explain why the AS curve slopes upward. (f) If v becomes larger while all other parameters stay the same, how does the AS curve change? (g) Define a steady state in the AS/AD framework.

Answer 1

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