Answer all questions with step by step explanations.

In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. Assume that Australia and New Zealand are trading partners. Australia's economy is currently in recession. a. Now assume that Australia begins to recover from its recession. Using a correctly labeled graph of aggregate demand and aggregate supply for New Zealand, show the impact of Australia's rising income on each of the following in the short run. i. Aggregate demand in New Zealand. Explain. ii. Outputin New Zealand b. Using a correctly labeled graph of the money market for New Zealand, show the effect of the output change in part (a)(ii) on the following. i. Demand for money. Explain. ii. The nominal interest rate c. Assume that the price level in New Zealand rises. Given your answer to part (b)(ii), explain what will happen to real interest rates. d. Although recovering, Australia remains in recession and its government takes no action. Indicate whether each of the following curves will shift to the left, shift to the right, or remain unchanged in the long run in Australia. i. Aggregate supply ii. Aggregate demand Price Level 35 30 25 20 15 10 AD1 AD2 =2 AS Aggregate Demand and Supply 0.5 1.0 1.5 2.0 25 3.0 3.5 4.0 Real Output Nominal Interest Rate 60 50 40 30 20 Money Market MD1 MD2 - MS 10 20 30 40 50 60 Quantity of Money