(a) Using the IS-LM and AD-AS models discuss what would happen in a closed economy starting from full-employment if there is an increase in the expected future MPK (without any change in the actual current or future productivity of capital, or future wealth of workers over the time period considered by the model). Use all relevant graphs. (6) (b) Using the IS-LM and AD-AS models discuss what would happen in a closed economy starting be- low full-employment if the central bank increases the supply of money. Use all relevant graphs. (4) Question 2: IS-LM in an Open Economy (15 Marks) This question is exactly number 5 of chapter 10, please make sure that you add graphs to support your answers. Consider the following Keynesian small open economy: 200 + 0.69Y = 80 - 1000r G = 20 NX 85 - 0.09Y - e e = 90 M = 115 = 0.5Y - 200r = 300 In this economy, the real interest rate does not deviate from the foreign interest rate.(a) Assuming this economy is in general equilibrium, what is the value of the interest rate r. (4) (b) Assuming fixed nominal exchange rates and a fixed domestic price level, what is the effect on domestic output if the foreign interest rate increases by 0.05? What is the size of the nominal money supply in the new short-run equilibrium? (4) (c) Assuming flexible exchange rates and a fixed domestic price level, what is the effect on domestic output if the foreign interest rate increases by 0.05? What is the value of the real exchange rate in the new short-run equilibrium? (4) (d) In the long run, how does the domestic price level respond to an increase in the foreign interest rate? (3)