Consider the following ISLM model: Y=C+I+E C=co+c1(YT) IzhLi MD=%Ln The central bank conducts quantity-setting monetary policy. a. Assume the government wants to reduce its budget surplus by adjusting government spending G. Explain the effects of this policy on the nominal interest rate, income, consumption, and investment in the short-run. Make sure your answer includes an appropriately labelled graph. b. The central bank is observing the government's policy from part a). What is the appropriate response if the central bank want to keep interest rate at the original level? What will happen to output following the policy mix? Make sure your answer includes an appropriately labelled graph. c. Now assume that the central bank has shifted its policy to the Zero-Lower-Bound (i.e., i = 0) to combat a severe recession. ls scal policy at the ZLB more, less, or equally effective compared to your result in 1a)? Why is there a Zero-LowerBound for nominal interest rates? (Hint: You do not have to include a graph here but you want to think about what shape the is and LM curves have at the ZLB and how this affects the functionality of policy making.)