Ms. Smart looks out of her office window on the 38th floor ofthe Central Bank of Fairytale. She just finished flipping throughthe Fairytale’s Economic Outlook report put together by the PolicyUnit division of the Central Bank. In the report, consumer spendinghas decreased by 2% from the previous fiscal year, and thecountry’s real GDP dwindled by 3% from the previous year. The GDPof Fairytale was 3.0 billion Fairytale Dollars (F$) and F$2.9billion in 2017 and 2018 respectively. At the same time, theconsumer price index increased from 111 in 2017 to 115 in 2018.Forecasts from the Statistics Fairytale show that the populationwill continue to grow at 2.3% for the next two decades. Thiscreates both challenges and opportunities for Fairytale. In 2001huge deposits of gold were discovered in the southern part of thecountry. This discovery attracted investments and the economy grewrapidly between 2002 and 2014. During this period, the governmentinvested heavily in research institutes, universities, and spaceprograms. In 2015, gold mining firms started to declare losses.This was caused by the declining gold deposit, high costs ofproduction and many lawsuits won by an environmentalist in theSouthern part of Fairytale. The Chief Economist estimated that ifall prices including nominal wages are fully flexible, real GDP ofFairytale in should be F$2.81 billion, everything else equal.Fairytale’s report shows that interest rates have been decreasingand nearly zero. The interest rate for 2017 and 2018 was 4% and 2%respectively. However, the demand for money has decreaseddrastically. The average household debt in Fairytale has increasedby 20% in the last ten months. Major commercial banks have reducedlending facilities to both households and businesses. Ms. Smartunderstands the economy of Fairytale very well. She belongs to theschool of thought that believes in government intervention in aneconomy. She has a Ph.D. in Economics from the National Universityof Fairytale, one of the best in the world. Mr. Free became thePrime Minister of Fairytale in 2019 and appointed Ms. Smart inJanuary of 2020. His election campaign was sponsored by theFairytale Society of Business, an association of business owners inFairytale. Mr. Free was a staunch critic of the previousgovernment’s policies centred on social housing, education, andnarrowing income inequality. The previous government increasedminimum wage from F$9.5 in 2017 to F$11 in 2018. The FairytaleSociety of Business was against the minimum wage and believed itshould be closer to the average wage of F$9. During his campaigns,Mr. Free promised to reform the tax system, especially thecorporate tax. 2 Ms. Smart faces a huge task of providing economicpolicy advice to the Prime Minister. As she looked over her officewindow, her eyes struck a huge billboard advertisement for a majortelecommunication firm. A sentence is inscribed on the board. Shestarred tensely at the board, the inscribed sentence reads – withpeople’s ideas, you can move the world. Answer the followingquestions: a) Describe the economic situation of Fairytale in FIVEwords! b) Based on what you have learned in this course, what wrongassumption/conclusion can be made by Ms. Smart? c) Use theaggregate demand and aggregate supply curves to explain the impactof a contractionary and expansionary fiscal policy on Fairytale’seconomy. d) When is Fairytale's economy in the short run or /andlong-run macroeconomic equilibrium? e) Using only two graphs,explain how an expansionary fiscal policy could be used to restorenormalcy to the economy of Fairytale. f) Using economic conceptsstate and explain the best policy that could be used to increasethe money supply in Fairytale. g) Use the concepts of lags toexplain the unanticipated effect of any policy action by Ms. Smart.h) Supposing you are the Chief Economic Advisor for Ms. Smart,propose two monetary policies and two fiscal policies? i) Usingeconomic concepts state and explain the potential issues orbarriers to your proposed policy. j) Determine the real interestrate in 2018. k) What is the percentage change in the real minimumwage? l) Do you agree with the arguments of the Fairytale Societyof Business on minimum wage?