1. The Fiscal Policy Mechanism Suppose macroeconomic situation in a country's economy that is caused by the pandemic. (a) Show the situation on the correctly labeled Keynesian cross graph in the (AE Y) space and on the correctly labeled aggregate demand and aggregate supply graph in the (P Y) space, labeling the initial point as A. (Hint: draw the short-run aggregate supply (SRAS) curve with a positive slope). (b) Because of the necessity to increase budget expenditures during the lockdown, scal authorities decide to change taxes. They will lower or raise taxes? Explain briey. On the graphs from part (a), show how this change affects the following in the short run. (i) Aggregate planned expenditures (ii) Aggregate demand (iii) Inventory investment (iv) Real output (v) Unemployment (vi) Price level Completely explain each of your answers. Label the new point as B. (0) Draw a correctly labeled money market graph and show the effect of the change in taxes, that you identied in part (b), on the interest rate. Explain your reasoning. Will it be the nominal or the real interest rate? ((1) Now draw a correctly labeled graph of the loanable funds market and show the effect of the change in taxes, that you identied in part (b), on the interest rate. Explain your reasoning. (Hint: assume two types of government budget positions: budget decit and budget surplus). Will it be the nominal or the real interest rate? (e) What components of aggregate planned expenditures (aggregate demand) are affected by this change in the interest rate. Explain and show the situation on the investment demand graph. What is the name for this effect? Explain the term. (D As a result of the changes, identied in point (6), completely explain, what will m happen to: (i) Aggregate planned expenditures (ii) Aggregate demand (iii) Inventory investment (iv) Real output (v) Unemployment (vi) Price level Using your answers, redraw the graphs from part (b) and show the eventual overall result. Label the new point as C. (g) The eventual result of the change in taxes by scal authorities, that you identied in point (b), will be less harmful for the economy, if the interest sensitivity of investment demand is high or low? Explain your