a. Supposed there is a permanent negative aggregate demand shock due to a weakened in consumer expectations and business sentiment. Using IS-PC-MR model,

(i)Explain the effects of the shocks on national income and inflation rate.

(ii)What we can predict the action from the central bank in achieving their

targeted level of inflation rate?

b.What happens to the money supply and the aggregate demand when the

confidence in the financial market is boosted? Assume the policy rate stays the

same throughout. Illustrate your answer using a 3-equation model diagram.