. [18 points] Suppose instead that the economic effect of the pandemic is exclusively a negative aggregate demand shock (a decrease in private spending on goods and services).

(2.a1) Use the AD/AS model to predict the short-run and long-run effects of this shock on output, the price level, employment, unemployment, and the real wage, assuming no policy response.

(2.a2) Suppose the government decides to use fiscal policy to neutralize the employment effects of the shock. What is the appropriate fiscal policy? Show how it is supposed to work using your AD/AS model.

(2.b) Now consider the open-economy IS/LM model and assume the exchange rate is freely floating. What will be the effects of just the consumption shock of (2.a1) on output and interest rates, the exchange rate, and foreign (rest-of-the-world) output and interest rates? How does your answer change if the government adopts the fiscal policy of (2.a2)?

(2.c) Assume the decrease in spending permanently raises the economy's private saving rate. Use the Solow growth model to predict the effects on steady-state income per capita. How does your answer change if this is accompanied by a reduction in multifactor productivity (as in problem 1, above)?