Problem
A. Derive the AD curve using the IS curve and the monetary policy rule. What does m represent in the AD curve? Draw a graph showing an AD curve with a large m and an AD curve with a small m.
B. Using the AS/ AD model, show the effect on the US economy of a world- wide recession reducing demand for US exports for a number of periods before the world economy recovers. Describe the process of returning to the steady state.