Suppose that this year's money supply is $7.5 trillion, nominal GDP is $22.5 trillion, and real GDP is $15 trillion.

Question 4 a. Explain why the government often runs a budget deficit when the economy is in a recession. b. In a closed economy, when the government's budget deficit gets worse, what will be the effect on the equilibrium interest rate and equilibrium investment? Illustrate your answer with a demand-and-supply diagram for loanable funds. c. Based on your answer to the question in part (b), if the government is running a persistent budget deficit over time, what will be the impact of the economy's long-run economic growth? Question 5 Suppose that this year's money supply is $7.5 trillion, nominal GDP is $22.5 trillion, and real GDP is $15 trillion. a. Calculate velocity of money and the price level. b. Suppose that velocity of money is constant and the economy's output remains unchanged next year. What will happen to the price level next year if the central bank raises the money supply by 2 percent? c. Suppose that velocity of money is constant and the economy's output rises by 2 percent each year due to technological advancement. What will happen to the price level next year if the central bank keeps the money supply constant? d. If the central bank aims to achieve the target of two-percent inflation rate, does this inflation target require two-percent in money growth? Explain with the reference to your answer in part (c)