1. Assume that the stock market experiences a massive rally, leading to a significant increase in household wealth. Analyze the effects of this increase in household wealth: a. On employment and the real wage (the labor market). Explain and show graphically. [5 points] b. On national saving, investment, and the real interest rate (the goods market). Explain and show graphically. [5 points]2. Assume that the economy is initially operating at full employment. Analyze the effect of a decrease in government purchases using the IS-LM model. (15 points) a. What happens to real output and interest rate in the short-run (what is the new short- run equilibrium)? Explain and show graphically. [5 points] b. What happens to real output and interest rate in the long-run (what is the new long-run equilibrium)? Explain and show graphically (you can use your graph from part a). [5 points] c. Now analyze the effect of an increase in government purchases using the AD-AS model. What role does the price-level play in restoring the long-run equilibrium? Explain and show graphically. [5 points]3. Classical economists view supply (productivity) shocks as the major cause of business cycle fluctuations, whereas Keynesian economists view aggregate demand shocks as the major cause of fluctuations. a. Graphically, depict the economy entering a recession due to an adverse supply (productivity) shock in the Classical IS-LM model. What happens to output and the real interest in the short-run? In the long-run? [5 points] b. Graphically, depict the economy entering a recession due to an adverse aggregate demand shock in the Keynesian IS-LM model. What happens to output and the real interest in the short-run? In the long-run? [5 points]4. Consider an increase in the nominal money supply by the central hank. a. Analyze the effects of this increase in the money supply using the Classical All-AS model {without the mispenceptions theory]. What happens to output and the genera] price level? Explain and show graphically. [5 points] h. Now, analyze the effects of this increase in the money supply Using the Classical AD- AS model with the misperccptiuns theory. 1What happens to output and the general price level? Explain and show graphically. [5 points] c. Finally, analyze the effects of this increase in the money supply using the Keynesian All-AS model. What happens to output and the genera] price level? ExPlaill and show graphically. [5 points]