Suppose that an economy is in its long-run equilibrium.
a) Use the theory of liquidity preference to graphically demonstrate what happens in the market for money when the Federal Reserve conducts contractionary monetary policy. Do not forget to label the axes.
b) Use the model of aggregate demand and aggregate supply to illustrate what happens to output produced (real GDP) and the price level in the short run as a result of such contractionary monetary policy. Do not forget to label the axes.
c) Explain what will happen to the economy in the long run if there are no additional monetary or fiscal policies implemented.
-What happens to the aggregate demand curve in the long run?
-What happens to the short-run aggregate supply curve in the long run?
-What happens to the price level in the long run?
-What happens to the quantity of output produced in the long run?