Problem 1. (Final Exam, Fall 2019) Use the IS-MP-PC framework to answer the following questions. Assume that the economy starts in period 0 in the no-shock long-run equilibrium, in which a = 0, Ro - r - 2%, o - 0, Yo - 0, and An - 0, with no - 2%. Assume also that the sensitivity coefficient in the Phillips curve is 3 - 0.5, and the sensitivity coefficient in the IS curve is b - 2. Be sure to draw the relevant IS-MP-PC diagrams for each of your answers below. Label all curves in periods 0, 1, 2 and mark equilibrium points. 1. Suppose that the economy experiences a reduction in exports that lasts for 1 period. Specifically, a = -2 in period 1 and goes back to zero in period 2. Sketch the paths of inflation and short-run output over time if the central bank's policy is to maintain the real interest rate constant at the initial level of 2%. What is the rate of inflation in period 2? 2. Now assume that the central bank wants to keep the inflation rate constant at 2% using monetary policy. What is the value of the real interest rate in period 1? 3. Assume that the government wants to keep inflation constant, as before, but using fiscal policy (via changes in government purchases) rather than monetary policy. What should this policy and its magnitude be? 4. Suppose that investment demand is less responsive to the interest rate. Specifically, 6 - 1. Will the magnitude of monetary policy response change relative to part 2 and, if yes, how? What will be the value of the real interest rate in period 1? Be sure to illustrate both cases (b = 1 and b - 2) on the same set of IS-MP-PC diagrams