Assume that there are no surprises, with all economic agents and the central bank having full information about shocks that are hitting the economy. Suppose that the central bank wants to keep thenominal GDPconstant, and interpret this model as a goal.

1. Assume the domestic country receives some new machines from a foreign country which contribute to increase the current capitalK. How should the central bank do in response, given its goal? Explain.
2. Assume the banks have decided to reduce their credit cards supply due to an increase of the default risk in the economy. How will you expect theMdcurve to shift with this change? What should the central bank do now? Explain.

(Note: The above two questions are unrelated.)