1. Using the lSLM model, answer the following questions: (a) With the appropriate gure, show how a decrease in the nominal money supply, M, changes real income and the interest rate. How do investment and consump- tion change? Explain. (b) Suppose that the price level now changes suiciently to bring income back to the level that prevailed before the increase in the nominal money supply. Use you diagram to show this change. How did the price level change (i.e. increase or decrease)? How to the new equilibrium values of consumption and investment compare to the values in equilibrium before the money supply decreased? 2. ln deriving the LM curve, we assumed that money demand was negatively related to the interest rate. Suppose instead that money demand depends only on the real value of transactions, Y. Draw the money demand curve for this case. What does the LM curve look like if money demand has this property? Explain. (Note: If money demand is independent of the interest rate, then we have the quantity theory of money from Chapter 5). 3. Answer the following question: (a) Using the Keynesian Cross, explain how a tax increase, AT, affects nation income. Using the appropriate multiplier, what is the magnitude of the change in national income, AY. What is the change in consumption and the change in investment? Explain. (Hint: for investment, what are we treating as exogenous in this model?) (b) Use the lSLM model to analyze the effect of the policy in part (a). How does the change in national income compare to what you found in part (a)? What accounts for the difference? How does the change in consumption compare to what you found in part (a)