Question 2 The Reserve Bank faces pressure to begin tightening monetary policy as the cost of living continues to rise. Using the ISLM model, explain the effects of a cont-actionarv monetary polic}F on output and the interest rate. How should scal policy respond if the government wishes to keep output at its current level? If money demand becomes more sensitive to the interest rate, should the scal response be stronger or weaker to maintain the current output level? [20 marks]