2. (30pts 4 bonus pts) In the IS-LM model seen in class, consumption only depends on disposable income. What happens if it also depends on the interest rate? Concretely, let's change C (Y) to C (Yd, r) where Cyd (Yd, r) > 0 and C, (Yd, r) <0. The intuition is that people spend more when their available income increases and are more tempted to buy expensive items like cars and houses when financing is cheap (i.e. when the interest rate is low). For each of the following questions, give appropriate mathematically justifications. 1 a) (6 pts) Does this change (C, (Yd, r) < 0 compared to a situation where C, (Yd, r) = 0) make the IS curve steeper, less steep or leave it unchanged? b) (4 pts) Does this change (Cr (Yd, r) < 0 compared to a situation where C, (Yd, r) = 0) make the LM curve steeper, less steep or leave it unchanged? *c) (16 pts) Does this change (C, (Yd, r) < 0 compared to a situation where C, (Yd,r) = 0) make monetary policy more effective / less effective, unchanged or is the change ambigu- is ous? (how does it change (Y)? (Justify well, make sure the implicit function theorem can be applied). dM d) (4 pts) Does this change (C, (Yd, r) < 0 compared to a situation where C, (Yd,r) = 0) make government expenditure more or less effective at stimulating the economy (how does it change dy)? Is it ambiguous? (Worth fewer points because you should be able to use most of the work done answering c). Probably ambiguous