Question: Autonomous Consumption = 2.25 trillion

Auntonomous Investments = 1.3 trillion

Government Purchases = 3.6 trillion

Taxes = 3 trillion

Additional cost of borrowing due to financial fricitons = 1

marginal propensity to consume = 0.75

sensitivity of investments to the cost of borrowing = 0.3

Monetary policy curve = r= 1+ actual inflation ( that is r(bar)=1 and lambda=1)

We also know that the AS curve is: p=pe+0.5(Y-Y*)

pe= expected inflation= 4.5

Y= current output

Y*= potential output = 7 trillion

(a) What is the short-run equilibrium level of output (Y)?

(b) What is the short-run equilibrium level of inflation (p)?

(c) What is the long-run equilibrium level of output (Y)?

(d) What is the long-run equilibrium level of inflation (p)?