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 1

A major component of the recovery plan is the use of fiscal policy and monetary policy to help stabilize the economy. With the use of appropriate IS-LM diagrams, illustrate the following:

a. The economic impact if the central bank were to maintain the money supply and the government were to engage in expansionary fiscal policy.

b. The economic impact of expansionary fiscal policy if the central bank seeks to maintain the interest rate.

c. The economic impact of expansionary fiscal policy if the central bank wishes to maintain the level of national income.

d. From parts a, b and c above, describe how the government can adjust its available fiscal tools to carry out the policy response stated above.

e. If the central bank were to use Open Market Operation as the preferred monetary tool;

I. What action would it take in part a. above?

II. What action would it take in part b. above?

III. What action would it take in part c. above?

f. From part d. above, determine with the use of appropriate calculations which fiscal tool(s) would be most effective in increasing real GDP if the economy's level of investment is 1,000 and its marginal propensity to consume is 0.73.

g. Explain what can be expected of the inside and outside lags of the fiscal intervention described in part d. above.

h. Explain what can be expected of the inside and outside lags of the monetary intervention described in part b. above.