QUESTion 1

1. [40 points total] Consider the IS-LM model based on the following equations. Q N C+cY,0O sch-1 || L+kYh.R,k>0,h.>0 \\.._____/ II E P G=G,NX=U,M*=M,P=P All variables are dened in the same way as in class. In this model, the central bank has a target real interest rate 2. Thus, in response to shocks, it adjusts money supply M to maintain R = r. For each of the following events, (i) identify which exogenous variable changes; (ii) explain how Y, C, I, and (%)d respond (only qualitatively}; and (iii) provide economic intuitions. (a) [10 points] The government buys more goods and services than before. (b) [10 points] Ination raises the general price level. (c) [10 points] Mobile payments make money less essential for transactions. (d) [10 points] Bad news ab out the economy makes rms reluctant to invest