The following questions should be answered using the Nominal Intertemporal Model of Chapter 12. Illustrate clearly the impacts on the economy described in the following questions and briefly explain / justify your answer. [

1] "Flights-to-quality" is a term used to describe a precipitous shift in liquidity demand during significant periods of uncertainty in the financial sector of the economy. Sharp increases in risk premia (measured, for example, by the spread between yields on corporate bonds and 10-year government bonds) and a decrease in velocity (the ratio of GDP to money supply) were signatures of the onset of both the Great Depression and the Great Recession. Assuming prices are completely flexible, illustrate the effects of an increase in liquidity demand. Does this change affect real income, interest rates, or wages? What variables are impacted and illustrate these effects.