Explain what is meant by the policy mix. Based on your understanding of the IS-LM model suggest a policy mix if the objective is to increase income (Y) while keeping interest rate (i) constant.(2 marks) b) Graphically illustrate and explain the short-run and medium-run effects on output, the interest rate and the price level of an increase in government expenditure in the AS-AD and the IS-LM framework. Assume that before the changes, the economy was at the natural level of output. (3 marks) c) The following equations describe a small economy. Figures are in millions of dollars; interest rate (i) is in percent per annum. Assume that the price level is fixed. Goods Market Money Market C = Co + cYD (Private consumption) (M/P)d = kY - hi (Demand for real balances) YD = Y + TR - T (Disposable income) (M/P) s = M0/P (Real money supply) T = To + tY (Total taxes) (M/P)d= (M/P) s (Money mkt. eq. condition) I = Io - bi (Private investment) G = Go, TR = TRo (Govt. Expenditure &Transfers) Y = C + I + G (Goods mkt. eq. condition) Endogenous Variables: C, YD, T, I, Y, i, Md andMs Exogenous Variables: Co = 350, To = 80, Io = 400, Go = 350, TRo= 250, Mo =550 and P =1 Parameters: c = 0.85, t = 0.20, b = 50, k = 0.25 and h =62.5 Policy variables: Fiscal policy: (G, t and TR), Monetary policy: (Mo, P) i. Derive the equations for IS and the LM curves. (2 marks) ii. Determine the equilibrium level of income (Y*) and the rate of interest (i*). (2 marks) iii. Suppose that the full-employment level of output (YF*) is $3500m. To achieve YF*, the government incurs an additional expenditure of $80m. Using these information: a. Determine the magnitude of crowding-out that result from the above fiscal expansion. (2 marks) b. Calculate the accommodative change in money supply that is required to simultaneously eliminate the crowding-out effect as well as to move the economy to full employment level of output. (2 marks) c. Show the transition dynamics that results in parts (a) and (b) (above) in an IS-LM