Question 3 (15 points) Topics 6 & 7 The policy makers of a closed economy are seeking proposals on how monetary policy should be conducted. Currently, there are two proposals have been submitted, and they are: Proposal 1: Use the policy to target (real) investment Proposal 2: Use the policy to target level of employment Suppose the economy experiences an improvement in payment technology such that most households are making transactions using mobile payment apps. You are asked to do the followings: Evaluate the effect of this change on the short-run equilibrium level of consumption under these two different proposals. Rank the change in consumption in ascending order (i.e., from smallest change to largest change) in the above proposals. Explain and support your answer by ONE IS-LM diagram (only the first diagram will be graded). Question 4 (25 points) Topics 6 & 7 Marocland is a closed economy that can be described by the IS-LM model. Long-run level of output: YFE = 30000 Consumption: C = 8250 + 0.5(Y T) 400r Investment: I = 5000 100r Government spending: G = 6500 Taxes: T = 5500 Real money demand: L(r, Y) = 0.2Y 50r Note: Interest rate, r, is expressed in percentage points, i.e., if r = 7.5, then r = 7.5%. Keep your answers to 3 decimal points if necessary. a) Derive the IS and LM equations in terms of the exogenous variables (4 points) b) In the initial (long-run) equilibrium, the central bank sets the level of nominal money to 40600. Find the resulting long-run equilibrium values of real interest rate, investment, and price level. (3 points) c) The economy is initially in its long-run equilibrium as shown in part (b). Now, with the rolling out of COVID-19 vaccine, businesses become more optimistic about the future economic outlook. As a result, autonomous investment changes by 3%. Find the (new) short-run equilibrium values of real output, real interest rate, and investment. Compute the (new) long-run equilibrium values of real interest rate, investment, and price level. (10 points) d) (Continued from part c) Suppose the central bank wants to increase the short-run level of output in part (c) by 1000 via a change in the level of money supply. Find the level of money supply that would achieve the goal. What will be the new (short-run) equilibrium level of real interest rate? (8 points)

Question 3 (15 points) - Topics 6 & 7 The policy makers of a closed economy are seeking proposals on how monetary policy should be conducted. Currently, there are two proposals have been submitted, and they are: Proposal 1: Use the policy to target (real) investment Proposal 2: Use the policy to target level of employment Suppose the economy experiences an improvement in payment technology such that most households are making transactions using mobile payment apps. You are asked to do the followings: Evaluate the effect of this change on the short-run equilibrium level of consumption under these two different proposals. Rank the change in consumption in ascending order (i.e., from smallest change to largest change) in the above proposals. Explain and support your answer by ONE IS-LM diagram (only the first diagram will be graded). Question 4 (25 points) Topics 6 & 7 Marocland is a closed economy that can be described by the IS-LM model. Long-run level of output: YFE = 30000 Consumption: C = 8250+ 0.5(Y-T) - 400r Investment: I = 5000 - 100r Government spending: G=6500 Taxes: T = 5500 Real money demand: L(r, Y)= 0.2Y - 50r Note: Interest rate, r, is expressed in percentage points, i.e., ifr=7.5, then r= 7.5%. Keep your answers to 3 decimal points if necessary. a) Derive the IS and LM equations in terms of the exogenous variables (4 points) b) In the initial (long-run) equilibrium, the central bank sets the level of nominal money to 40600. Find the resulting long-run equilibrium values of real interest rate, investment, and price level. (3 points) c) The economy is initially in its long-run equilibrium as shown in part (b). Now, with the rolling out of COVID-19 vaccine, businesses become more optimistic about the future economic outlook. As a result, autonomous investment changes by 3%. Find the (new) short-run equilibrium values of real output, real interest rate, and investment. Compute the (new) long-run equilibrium values of real interest rate, investment, and price level. (10 points) d) (Continued from part c) Suppose the central bank wants to increase the short-run level of output in part (c) by 1000 via a change in the level of money supply. Find the level of money supply that would achieve the goal. What will be the new (short-run) equilibrium level of real interest rate? (8 points)