II. Consider an economy described by Fig. 6 on page 19 of the Ch.6 slides. a. Suppose the nominal policy interest rate is 5%. If expected inflation decreases from 3% to 2%, in order to keep the LM curve from shifting in Fig. 6, what must the central bank do to the nominal policy rate of interest? b. If the risk premium on risky bonds increases from 5% to 6%, does the LM curve shift? c. If the risk premium on risky bonds increases from 5% to 6%, does the IS curve shift? d. What are the fiscal policy options that prevent an increase in the risk premium on risky bonds from decreasing the level of output? e. What are the monetary policy options that prevent an increase in the risk premium on risky bonds from decreasing the level of output?

In economic theory, production costs are the costs incurred by an industrial organization when it engineers a project or provides a service that generates revenue and benefits. Labor costs, raw materials, consumable manufacturing costs, and general overh…