Question 1 (2.5 Marks) Explain why you agree or disagree with the following statement in quotations. Be sure to provide a thorough explanation. "Inflationary gaps and recessionary gaps are equally quick to be eliminated through the adjustment process towards long-run equilibrium"Question 2 (5 Marks in total). There are 4 parts to this question. Part A (1.5 Marks): Assume the economy is originally operating above its potential. Represent this situation using an Aggregate Demand - Aggregate Supply diagram below. Be sure to include all relevant curves and to label your diagram appropriately (including units). Part B (1 Mark): Now assume that the government decides to increase its spending, all else equal. Represent this change in your diagram. Provide a brief description of how this change would be shown to affect the economy in the AD-AS model here:Part C [1.5 Markslz Assuming no other Aggregate Demand or Aggregate Supply shocks, provide an explanation for how you would expect the economy to adjust in the long run given the situation as described in Part A and Part B. Please use your diagram to support your explanation (this would include any additional changes to the diagram). Part D [1 Mark): Provide comment on whether you think the government's policy choice in Part B was a good one. Question 3 14 Marks in total! There are 3 Parts to this guestion. Please don't miss Part C on the next Page! This question is about money and money creation by the banking sector. In all parts of this questions assume the following: I the target reserve ratio for all banks in the economy is 2% I there is no currency drain from the banking system (all money created by loans is deposited back into the banking system). there are only demand deposits banks invest only in loans banks are able to loan out all excess reserves always the denition of the money supply is the cash in circulation + demand deposits. Part A [1 Mark!: Assume that $100 of cash from your wallet is deposited into your bank. What amount of excess reserves does your bank have following your $100 deposit? Show your work. Part B 11.5 Marksl: How much new money will be created by the banking system as a result of your initial $100 deposit? Show your work. Part C [1.5 Marks): Do you think this question provides an accurate representation of the amount of new money that would be created by the banking system? Why or why not? Provide support and explain. Note: you should be able to answer this part of the question with a general discussion even if you have not been able to answer parts A andlor B. Question 4 (2.5 Marks): For this question, concentrate on the short-run performance of the economy and the chain of events predicted using the \"monetary transmission mechanism\". Provide a detailed explanation for how, all else equal, an increase in the money supply is predicted to affect Net Export spending. Question 5 [3 Marks}: A prediction using the monetary transmission mechanism is that, in the short run, changes in the money market will change interest rates and eventually lead to a change in real GDP. The \"strength\" of the monetary transmission mechanism refers to how effective changes in the money market are in changing real GDP in the short run. Part A: In the short run, what role does the shape of the Investment function have on the \"strength\" of the monetary transmission mechanism? Explain. Part B: In the short run, what role does the shape of the Money Demand function have on the \"strength\" of the monetary transmission mechanism? Explain