1 A country reduces its government budget deficit and also makes political reforms that lead people to

believe this country's assets are less risky. Given the combination of a reduced deficit and lower asset

risk, what happens to the interest rate?

2 Refer to Figure below. Identify long run outcomes when the aggregate demand of the

economy is given by AD2

Price + LRAS Level SRAS P3 P 2 AD1 P1 AD 2 Y3 Quantity of Y1 Yz Output