Problem 2. The Extended IS-LM model. 20 points. Figure 1: Initial Equilibrium Real Interest Rate (r) LM r 0 Yo Output (Y) IS(x0) 1. Consider the initial equilibrium shown in the figure above. (a) (3 points) Write down the equations representing the IS and LM relations in the extended model seen in the figure above. What is the borrowing rate? What is the policy rate? (b) (4 points) Explain why can't the Fed change the policy rate directly. (c) (4 points) The Fed decides to boost the economy as much as possible by changing the policy rate. Draw a graph showing the resulting equilibrium. (Hint: is there a limit to the policy rate?) (d) (4 points) The economy reaches the zero lower bound of the nominal interest rate. Explain how can the Fed use unconventional monetary policy to reduce the risk premium To and boost the economy in this situation