2. Monetary Policy in the NK model with backward looking expectations Explain, using diagrams, the effects of monetary policy in the following three equation model of the economy, y = ajg-a, (i + p - n' - r) - a,t+d IT = 1 + y y + 7 2 Its iP =T - p+ + h(1-1*)+by+ v where z is the inflation rate, 7 =_ is the expected inflation rate and x* is the inflation target. The policy interest rate set by government is up. j, g, and ~ are respectively the deviations of output, government spending and taxes from their steady state values. Demand, supply and monetary policy shocks are given by d, s and v respectively, while a,, a2, P,T, a,, 1, 72,h and bare all positive constants