2. ISLM/AD-AS Framework and Monetary/ Fiscal Policy (25 points) Consider an economy like Argentina in 2001. Due to rampant corruption from the government, massive tax evasion, and money laundering activities, both consumers and investors become very pessimistic about the Argentine economy. Suppose initially, the economy is in a long run equilibrium. (8) (4 points) Using both the IS-LM and ADAS diagram, explain what happens to the economy in the short run when people become pessimistic about the economy. What will happen to output and the real interest rate? Please provide gures with corresponding explanations (please label the variables and direction of shift of curves clearly). (6 points) If you are the government of Argentina, what would you do with government spending in order to offset the effects of the pessimism? Explain using both the IS-LM and AD-AS diagram. What will happen to output, the real interest rate, price level, investment, and the consumption as the result of the government's action in both the short run and the long run? Please provide gures with corresponding explanations (please label the variables and direction of shift of curves clearly). (6 points) If you are the central bank of Argentina, what kind of monetary policy that you can implement in order to offset the effects of the pessimism? Explain using both the ISLM and AD-AS diagram. What will happen to output, the real interest rate, price level, investment, and the consumption as the result of the central bank's action in both the short run and the long run? Please provide gures with corresponding explanations (please label the variables and direction of shift of curves clearly). (9 points) Suppose the Argentine government has very limited scal space, and it is already running very high budget decit so that the government is very likely to default on its debt, and simultaneously, the nominal interest rate in Argentina is very close to zero, or the zero lower bound (ZLB). (i) Is it still appropriate to use the policy suggested in part (b)? Why? (ii) Is it still appropriate to use the policy suggested in part (c)? Why? (iii) What kind of policies can be implemented in order to offset the effects of the pessimism? Please suggest at least 1 policy and explain why it works