Question 2: The IS-LM model with sticky prices Consider a closed economy with sticky prices and an efficient term structure of in- terest rates: y = -ORL +8, m-p= -ARs + ry+a, p=(y-y), RL RL = Rs. RL (Q4.1) (Q4.2) (Q4.3) (Q4.4) Here m is the logarithm of the money supply, g is the logarithm of an indicator for) budgetary policy, p is the logarithm of the price level, y (y) is the logarithm of the (natural) output level. RL is the yield on long-term bonds ("perpetuities"), and Rs is the short-term interest rate. (d) Show that an unanticipated and permanent budgetary expansion (rise in g) leads to an immediate increase in the long-term interest rate. Show what hap- pens (at impact, during transition, and in the long run) to output, the price level, and the short-term interest rate. Illustrate your answers in an impulse- response diagram (e) Show that an anticipated and permanent budgetary expansion (a future in- crease in g) will cause a recession at first and will only stimulate the economy further into the future. Show what happens (at impact, during transition, and in the long run) to output, the price level, and the short-term interest rate. Il- lustrate your answers in an impulse-response diagram. (t) What happens to the long-term interest rate if the anticipated budgetary ex- pansion (studied in the previous subquestion) does not take place? (At imple- mentation time, t, the government announces that it will keep g unchanged). Illustrate your answers in an impulse-response diagram. (g) * Assume that the real (rather than the nominal) long-term interest rate, TL = RL - P, features in equation (Q4.1). Assume furthermore that 0