Homework 2 The 1980 and the 1981-1982 Recessions [10 points]. (a) In 1979 there was an oil shock: oil prices almost doubled. Use the IS-LM-FE and ADAS theories to predict the effects on interest rates, output, and prices. (b) In 1980-1981 monetary policy became contractionary and the government reduced taxes. Use the IS-LM-FE and AD-AS frameworks again to predict the effects on interest rates, output, and prices. (c) Consider the following U.S. data: Real Inflation Real (short-term) Year Output Growth Rate Interest Rate 1978 5.3% 7.8% -0.1% 1979 2.5 11.2 1.0 1980 0.2 13.5 2.1 1981 1.9 10.4 4.2 1982 2.5 6.0 3.9 1983 3.6 3.2 5.1 Are these developments consistent with your predictions in parts (a) and (b)