Question: Please help! 2. Assume that the economy is initially operating at full employment. Analyze the effect of a decrease in government purchases using the IS-LM

Please help!

2. Assume that the economy is initially operating at full employment. Analyze the effect of a decrease in government purchases using the IS-LM model. (15 points) a. What happens to real output and interest rate in the short-run (what is the new short- run equilibrium)? Explain and show graphically. [5 points] b. What happens to real output and interest rate in the long-run (what is the new long-run equilibrium)? Explain and show graphically (you can use your graph from part a). [5 points] c. Now analyze the effect of an increase in government purchases using the AD-AS model. What role does the price-level play in restoring the long-run equilibrium? Explain and show graphically. [5 points]

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