(a) In the simple Keynesian goods market model, we assume that transfer payment is zero in lecture. In this question, we assume that transfer payment can be positive but other features in the model are the same in lecture. Due to pandemic, many countries adopted lockdown measures. Suppose this will reduce autonomous private consumption by an amount of 100 in an economy. (i) To counter this effect, the government intends to subsidize consumers via transfer payment. How much transfer payments must be involved to fully offset the consumption reduction? Explain the reason why you think that the amount should be what you suggest. (ii) You are an economic advisor for this government. You think that an amount smaller than your answer in (i) is needed to offset the 100 reduction. What will you suggest? Explain why your suggestion can do this. (iii) Another economic advisor argues against your suggestion in (ii). Think about what disadvantages your suggestion in (ii) would be, compared to (i). (b) Now, consider the government has decided to give a transfer payment of 100 to consumers. (i) In a Keynesian-cross diagram, illustrate the change. You should indicate clearly the numerical value of the intercept changes of relevant lines, and the value change in equilibrium output. Explain also if the change involves a parallel shift or non-parallel shift. (ii) Is the change involved in (i) a movement along the same IS curve, or a shift in IS curve? Explain. If a shift is your answer, you should also explain if the change involves a parallel shift or non-parallel shift. (c) Ignoring the policies involved in (a) and (b), the central bank also considers a policy to keep the short-run equilibrium output the same as if no pandemic appeared. (i) Do you think the policy induces a lower or higher interest rate? (ii) In your answer in (i), explain why interest rate must go up, or go down, or remain unchanged for the policy goal. (iii) Is the policy involved in (i) facilitated by an increase or a decrease in money supply? (iv) Ifthecentralbankdoesnotbuyorsellfinancialassetsforthepolicy involved in (iii), what can it do to facilitate the money supply change? (v) Explain the disadvantage of the measures in (iv) relative to buy-or-sell financial assets in changing the money supply. (d) Now, suppose both policies in (b) and (c) are adopted. The combined effect is that output can be maintained at the same level before the pandemic, but one policy is adopted before another. Then, both (i) "a movement along the same LM curve" and (ii) "a shift in LM curve" may be involved. Explain which steps taken in (b) and (c) will generate (i) and (ii). Also draw the IS-LM diagram to describe the change involved in these steps from (b) to (c). (e) Now, the effectiveness of both policies above depends on the shapes of the IS/LM curves. Suppose that, instead of lump-sum tax, proportional tax T=tY, where 1>t>0, is adopted in this economy. What can the government do to affect the effectiveness of the policies? Explain