Question 2 Consider the model of fmancial intermediation described in Woodford (2010) and the augmented IS-LM model. IS: Y = D(Y,r,p(w)) + G LM: M/P=L(Y,r) Note that the function p ( . ) is the macro-nance risk premium, which is a function of (D, the interest rate spread. a) Show in reference to the above model and appropriate diagrams that an increase in the interest rate spread between the bank lending and deposit rates leads to a contraction in output. b) Explain why a persistent increase in the risk premium as captured by the variable (0 can make cutting the interest rate by the central bank ineffective in terms of restoring output. Show your answer this diagrammatically