1} Suppose that due to a housing price bust (Le. house prices unexpectedly fall], households' wealth falls (cg. 'underwater' mortgages). This is an example of a negative wealth shock, which makes households less willing to spend {i.e. consumption falls. ceteris paribus}. Use this information to answer parts a. b of this question. a. Use the standard IS-LM framework to analyze the effect of the shock mentioned above on the equilibrium interest rate and the equilibrium income. Clearly label the graph, carely marking the initial equilibrium and the short run equilibrium after the shock. Explain the intuition as of why and how the equilibrium interest rate changes. b. Now suppose that the government wants to mitigate the short run negative effect of this shock. 1|With the help of the IS-LM model, analyze policies {scal and monetary) that the government and the Fed can pursue in the short run to bring the economy's output back to its initial {pro-shock} level. You can analyze each policy on a separate graph and assume that the policy is powertl enough to bring the economy's output to its initial equilibrium level on its own. Starting from the after-shock equilibrium point, show how each policy brings the economy's output back to its pre-shock level. Explain in words (that is, provide intuition of) how and why equilibrium output and interest rate change in response to each policy. Clearly label the graphs