The Fiscal Policy Mechanism Suppose a country's economy is in a long-run equilibrium, but has a large budget deficit. (a) Show the situation on the correctly labeled Keynesian cross graph in the (AEY) space and on the correctly labeled aggregate demand and aggregate supply graph in the (P - Y) space, labeling the initial point as A. (Hint: Draw the short-run aggregate supply (SRAS) curve with a positive slope). (b) In order to decrease budget deficit fiscal authorities decide to change government transfer payments. On the graphs from part (a), show how this change affects the following in the short run. Aggregate planned expenditures Aggregate demand (iii) Real output (iv) Price level Explain your answers. Label the new point as B. (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. Explain your reasoning. Will it be the nominal or the real interest rate? (d) Now draw a correctly labeled graph of the loanable funds market and show the effect of the change in government transfer payments you identified in part (b) on the interest rate. Explain your reasoning. Will it be the nominal or the real interest rate? (e) What components of aggregate planned expenditures (aggregate demand) are affected by this change in the interest rate. Explain and show the situation on the investment demand graph. What is the name for this effect? Explain the term. (1) Redraw the graphs from part (b) and using your answer from part (e), show and explain the result. Label the new point as C