7. Suppose that the government cut taxes while the central bank pursued a contractionary monetary policy. What would be the effect of this policy mix on an economy? Explain and draw the IS-LM model to support your answer. 8. A closed economy is characterized by the following characteristics: The consumption function is 755+0.6Yd, the investment function is 1500+0.05Y-2r, government expenditure is 500, and it also collects a lump-sum tax of 100 and 15 percent of income tax. The economy has a money demand function of 600+0.2Y-5r and a money supply of 1800, whereas the price level is 1. a) Find the equilibrium levels of interest rate (r), output (Y), consumption (C), and investment (I) of the economy. b) Assuming that there has been inflation in the economy by 5% due to a negative price shock in the short run, find the new rate of interest (r) and the new equilibrium output (Y), consumption (C), and investment (I) of the economy in the short run. c) From your findings in part a) and b), explain all the changes/effects on the economy in this short run.