2. (35 marks ) Consider now the full intertemporal model in which in addition to the goods and labour markets, the money market also clears. The supply of money is determined exogenously by the government. The demand for real money balances of consumers and firms is given by Ma = L(Y, R), which depends positively on real income Y (trans tion motive) and negatively on the nominal interest rate R (opportunity cost of holdi money). Suppose the economy is initially in long-run equilibrium. Now, suppose that there is a war with a neighbouring country that destroys part of the economy's current stock of capital K and reduces current productivity z at the same time. (a) ( 12 marks ) How will the simultaneous drops in K and z affect the current eq librium values of the price level, consumption, investment, the real interest rate, aggregate output, employment, and the real wage? (b) (8 marks ) Suppose that in response to the negative shock in (a) the government increases the money supply (known to agents) by an amount A M in order to bo employment and output. Using diagrams analyze the equilibrium effects of th policy (in combination with the negative capital-productivity shock in (a)) on the price level, consumption, investment, the real interest rate, aggregate output, em- ployment, and the real wage. Is the policy effective in increasing employment and output? (c) (7 marks ) How would your answer to part (b) change if agents did not obse (know) that the increase in M has taken place? Analyze the effects of the unantic ipated increase in M in the context of the Lucas-Friedman imperfect information model. (d) (8 marks ) How would your answer to part (b) change if the price level was fixed or "sticky"? Analyze the effects of the increase in M in the context of the N V