Question 4 [9 marks] Suppose the central bank of a closed economy restricts the money supply. Assume the economy is initially at the natural level of output. Based on the above information, answer the following questions. (a) Use an IS-LM diagram to illustrate both the short-run and the long-run effects of the monetary policy. Be sure to label clearly the following: axes, curves, initial equilibrium values, the direction of curve shifts, short-run equilibrium values, and long-run equilibrium values. (4 marks) (b) Since the government is concerned the monetary policy would result in job losses in the short run, the government increases government spending simultaneously to offset the impact of the monetary policy. Based on the information given, answer the following questions. Examination continues on next page Page 3 of 5 Semester One Final Examinations, 2022 ECON7021 The Macroeconomy i. Use an AD-AS diagram to illustrate the impact of the policy mix (lower money supply and higher government purchases) on the equilibrium price level and output. Be sure to label clearly the following: axes, curves, initial equilibrium values, the direction of curve shifts, and terminal equilibrium values. (4 marks) ii. Will the policy mix achieve the government's goal of stabilising output, i.e., keeping unemployment at its natural level? (1 mark)