Appendix A Graphs for Q1.2 and Q2.3 Real Real Interest Interest Rate Rate r r I(r) I(r) I(r)' Savings/ Savings/ S S Investment Investment (a) (b) Real Nominal t IS IS ' Interest IS IS Interest Rate Rate LM LM i=r GDP V VI GDPSECTION A The following economy applies to questions 1-3. Assume an economy in which the con- sumption (C) and investment (/) functions are given by C = 100 + 0.5 - (Y - T) / = 500 - 1000 . r where Y is real output and r is the real interest rate. Government purchases and taxes are G = 500, T = 100. The LM (money market equilibrium) curve is where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is * = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to a* = 0.05. Question 1 Derive the long-run equilibrium values of output Y', consumption C, private and public savings Sprivate and Spublic, investment I, the real and nominal interest rates (r, i) and price P, before and after the vaccine news shock. In particular: [28 marks] 1. Explain how the long-run values of (r, i) are determined before the vaccine news shock. 2. Which, if any, of the graphs from Appendix A best depicts the long-run change in the interest rate(s) due to the vaccine news shock? Explain. 3. Explain how the long-run values of (Y, P) are determined before the vaccine news shock. 4. Which, if any, of the graphs from Appendix B best depicts the long-run change in output and price due to the vaccine news shock? Explain. 5. Fill in the following table in your answer sheet with numbers-there are 16 numbers to solve for