am (W) (V) Let us assume that the demand for real money balances is given by: g=YQL where M is money and P is the general price level, and d1 and {12 are exogenously given positive parameters. Solve for the equilibrium level of the real money supply when i = 1', so at the initial equilibrium. Then, compute the necessary change in the real money balances after the monetary authority's response to the increase in the private sector's confidence described in the previous question (question (ii)). Draw a graph that depicts equilibrium in the financial markets (i.e., the market for real money balances}, before and after the monetary response. Explain the monetary policy response. Let us now assume that the consumption function is given by: C 2 CD + clYD czi, where {:2 > 0 is the impact of the interest rate on aggregate consumption. What do you think can justify this assumption; i.e., that consumption is negatively related to the interest rate? What does this imply for households' consumption behaviour? Assume that an and cl remain unchanged. Derive and interpret the IS relation using the consumption function in the previous question (question (iv)), and compare it to the one you derived in question {i}. Is the slope of the IS curve now flatter or steeper? And what does this imply for monetary policy effectiveness? Is now the change needed for the monetary response described in questions (ii) and {iii} higher or lower21