Suppose a country's economy is in a long-run equilibrium, but has a large budget deficit.

(a) Show the situation on the Keynesian cross graph in the (AE - Y) space and on the aggregate demand and aggregate supply graph in the (P - Y) space, labeling the initial point as A.

(b) In order to decrease budget deficit fiscal authorities decide to change government transfer payments.

Show how this change affects Aggregate planned expenditures, Aggregate demand in the short run. (on the same graphs)

(c)Draw a correctly labeled money market graph and show the effect of the change in government transfer payments you identified in part (b) on the interest rate. Will it be the nominal or the real interest rate? What components of aggregate planned expenditures (aggregate demand) are affected by this change in the interest rate?