In this exercise, you are going to use the short-run model (IS-MP + Phillips) to analyze and forecast what is going to happen to the economy. You are going to describe the economy starting at year 01 (t = 1) to year 04 (t = 4). . For the whole exercise, assume: - The following parameters: b = 0.5, 7 = 1, r = 2%. - At t = 0: the inflation rate was 2% (71=0 = 2%), the interest rate t=0 = 7, output were at potential Y=0 = 0. 2.1 The economy during t = 1 . Assume that at t = 1: - The government implements a fiscal stimulus that leads to a = 4%. - The Central Banks keeps the interest rate at r. - There are no other shocks. Questions: . Q1 (5 points). Answer the following: a) Give two different examples of fiscal policies that the government could implement to generate a fiscal stimulus that could lead to an increase in a. b) If the fiscal stimulus is able to increase a, as the question assumes, do you think the Ricardian equivalence holds in this economy? Explain. . Q2 (10 points). Use the IS-MP diagram and the Phillips curve to show what happens to the economy at t = 1. - Clearly show how the curves would move and the equilibrium outcomes. - Provide a numerical answer for the equilibrium values of: Yt=1 and 7=1. 2.2 The economy during t = 2 . Assume that at t = 2: - There is a rise in oil prices that leads to o = 2%. - The Central Banks increases the interest rate to rt=2 = F + 1%. - There are no other shocks. Questions: . Q3 (10 points). Use the IS-MP diagram and the Phillips curve to show what happens to the economy at t = 2. - Clearly show how the curves would move and the equilibrium outcomes. Provide a numerical answer for the equilibrium values of Y 2 and