Problem 1. Use the IS-MP 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, R - r, and Y - 0. Be sure to draw the relevant IS-MP diagrams for each of your answers below. 1. A recession in Europe reduces demand for U.S. goods and services in period 1. Examine the consequences of this shock in the standard IS-MP framework. What should be the fiscal policy response to this shock if the government wants to maintain zero short-run output? 2. Assume that political gridlock in Congress prevents the government from implementing an adequate stimulus as a result of which only half of the initial shock is counteracted with fiscal policy. Hence, the Fed decides to use monetary policy tools in order to bring short-run output to zero. What should the Fed's response be? 3. Will the magnitude of the required monetary policy response in part 2 be larger or smaller if investment demand were more sensitive to changes in the real interest rate (that is, if the b parameter of the IS curve were higher)? Illustrate both cases (with high and low b) on the same diagram