READ THE SCENARIO BELOW AND ANSWER THE QUESTIONS THAT FOLLOW.

Scenario

A The novel coronavirus continues to affect several countries around the world. As of November 12, 2020, the World Health Organization reported 51.8 million cases and 1.28 million deaths globally. As part of the public health response to limit the spread of the virus, several countries have chosen to close their borders to foreign visitors, and in many ways, these countries now operate as pseudo-closed economies. Additionally, several businesses in the services sector, including bars, hair salons and restaurants, have been forced to close to limit potential community spread. These and other restrictions have negatively affected economic activity as businesses remain closed and people stay at home. One such country that has had this experience is Caribe Isla, a small island nation located in the West Atlantic. Furthermore, in light of the economic decline, the government has articulated a recovery plan to transition the economy out of its current recession. Answer the following four questions based on Caribe Isla's experience in managing its economy in the face of the COVID19 pandemic.

Question

a. If the money supply were to increase by 20%, the real interest rate remains at 9% and output falls by 12%, calculate the change in the price level and the value of the nominal interest rate. State the theories used to calculate these values.

b. Assume that the economy has sticky prices, use the model of macroeconomic equilibrium to illustrate on a clearly labelled diagram the impact on the economy when there are noted supply chain disruptions due to shut down measures in response to the pandemic and the government intervenes to restore disequilibrium.

c. If the government had not intervened in part b. above, describe what would be the current and potential economic outlook for this country.