Problem 3 (20p) Consider the following hypothetical news items. Answer each part of this question independently. Draw an appropriate diagram to support your answer, explain briefly, and mark the boxes. a. (10p) Suppose Congress and the President unexpectedly agree on a major tax cut. The Fed keeps the real interest rate stable. Determine the likely impact on U.S. stock and bond prices. Impact on: Bond prices Stock prices up/down/constant/uncertain) Explain: b. (10p) Suppose civil war erupts in a strategically important foreign country, which creates uncertainty about world-wide economic growth. The Fed keeps the U.S. real interest rate stable. Determine the likely impacts on world stock prices and on Treasury bond prices. Impact on: Bond prices Stock prices (up/down/constant/uncertain) Explain: AProblem 2 (401)): You are asked to examine the following economy. The economy has sticky prices in the short run, but prices adjust in the longer run. Natural-rate-level output is constant. Velocity depends on interest rates and does not display long-run growth. Initially, money growth is 3%; ination is 3%; the real interest rate is 1%; output equals potential output. Consider the following policy change: The central bank announces that it will shift the MP curve up, i.e., increase F in the MP relationship r = F+u 1:. Assume the policy change is was unexpected and it is interpreted as a permanent change. a. (20p) Determine the m impacts of this policy change on real output and on the ination rate. Illustrate your answers in the output-interest rate and output-ination diagrams below. Label the axes and curves. Mark initial values with \"0\" and values after the policy change with \"l ". Explain briey. m Reanmmm _ Output Real Interest Rate Diagram Output Ination Diagram Explain