2. [12 points] Rapid recovery from the Covid recession is causing inflation to reach 4% in Germany, for the first time in nearly 30 years (the Economist, May 27, 2021). Since the country's hyperinflation in the 1920s, Germans have been extremely averse to inflation, so suppose this is now causing Germany to target "price stability". (2.a) Suppose Germany decides to pursue higher interest rates. Use the money market to determine what monetary policy (expansion or contraction) is needed to achieve the increase in interest rates. (2.b) Use the IS/LM/FE model to predict the short-run and long-run effects of the monetary policy of (2.a) on Germany's output, interest rate, and prices. Is this the appropriate policy to reduce inflation? (2.c) Use the AD/AS model to predict the effects of the same monetary policy of (2.a) on Germany's GDP, the price level, employment, and real and nominal wages. Does it matter if wages are flexible? (2.d) Germany's demographics mean that its labor force may be shrinking. How does that change your answer in (2.c) about employment, unemployment, and wages? Use the labor market