(26 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 central bank. The demand for real money balances of consumers and rms is given by \"4%\"! = L(Y, R), which depends positively on real income Y (transac- tion motive) and negatively on the nominal interest rate R (opportunity cost of holding money). For this question assume that rms and consumers receive the safe interest rate r when lending, but have to repay the risky rate r3 = r + a: when borrowing. Note that a- is the default premium, that captures perceived credit market uncertainty. The economy is initially in long-run equilibrium. Suppose that a pessimism shock hits the economy, whereby credit market uncertainty :5 increases today, and TFP in the future 3" is expected to fall. (a) (12 marks) How will the simultaneous increase in a; and decrease in z' affect the current equilibrium values of the price level, consumption, investment, the real interest rates (safe and risky), aggregate output, employment, and the real wage? (b) (7 marks) Suppose that in response to the negative shock in (a) the government increases the money supply (known to agents) by an amount AM in order to boost employment and output. Using diagrams analyze the equilibrium effects of this policy (in combination with the negative joint shock in (a)) on the price level, consumption, investment, the real interest rates (safe and risky), aggregate output, employment, and the real wage. Is the policy eifective in increasing employment and output? (c) (7 marks) How would your answer to part (b) change if agents did not observe (know) that the increase in M has taken place? Analyze the effects of the unantic- ipated increase in M in the context of the Lucasiedman imperfect information model