Question 11 (40 Marks) The UK government has recently announced an ambitious programme of increased public spending to combat the effects of the Covid-19 crisis. At some point in the future, however, this policy will have to be reversed.

(i) Using the IS-LM-PC-WS-PS model developed in class, explain how income, the unemployment rate, prices, inflation and the real interest rate, (both in the short run and in the medium run) will be affected if the government decides to decrease the level of market regulation (captured in our model by variable m (with m2

(ii) Based on your response in (i) above, explain what happens to consumption in the medium run as a result of this policy change (5 marks).

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