1) Suppose a country begins in full equilibrium in the AS-AD model: - z I LVQFC) ,__} Rumors of a new virus lead consumers to become conservative regarding their expensesboth because they wish to avoid contagion and because they fear a recession. Similarly, rms cut back on investment, expecting less demand for their products. Assume for convenience that if this situation does not last too long, supply- side mechanisms like supply chains will be unaffected. a) '9) Use your diagram to illustrate the effect of the rumors on the economy. Do these rumors risk creating a recession? Do they risk raising ination? Explain briey using a diagram. Make any assumptions you think are necessary. You are a central banker in this country and believe that the rumors are too alarmist. The best information you can gather suggests the new virus produces rather mild symptoms. But you also think it will take a while for that to become clear, maybe even a few months. Once it becomes clear, you believe, consumption and investment levels will return to normal. Given your priors, illustrate in a new gure and briey discuss What policy you might implement. Briey mention some specic steps you might take. Make any assumptions you feel are necessary. What uncertainties would you face in implementation? For example, suppose that rather than taking months, people somehow quickly change their minds and realize the new virus is not a big deal. How would that simplify or complicate your task