1.Imagine that an economy is hit by a negative supply shock. How can the central bank respond? Use the real business cycle model and show on the graph the different possibilities. Additionally, explain the tradeoff faced by the central bank.

2. What is the natural rate of unemployment? Explain how the different types of unemployment that are included in such rate differ from each other.

3. Explain what the crowding out effect is in the context of expansionary fiscal policy.

4. How does a market reach a new steady state?