Topic 1:Within the IS-LM framework, illustrate the effects of a shock. For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous):Y, i, E, C, I, TB.Assume the government allows the exchange rate to float and makes no policy response.

The IS-LM framework:

IS:Y =12 - 1.5T -30i +2G,and

LM:M = Y(1-i). Assume P=1.

1. Foreign output decreases.
2. Money supply increases.
3. Government spending increases.

Topic 2: The Home interest rate equals the Foreign interest rate of 10% or 0.1. Taxes and government spending both equal 2.

1. Based on the IS, what is the level of outputY? Assume this is the desired full employment level of output.
2. Based on the LM, at this level of output, what is the level of the Home money supply?
3. Plot the IS and LM curves on a chart. Label the axes and the equilibrium values.