1. Draw graphs and explain in no more than five sentences the effects on the equilibrium real interest rate ( r ) and equilibrium quantity demanded of money (M/P) of the monetary policy or change in the market for the real goods and services. Assume that cash and government bonds are the only financial assets in the money or financial market. Note that M is nominal money, P is aggregate price level of real goods and services, and Y is aggregate real income, output, or real GDP.

a. The central bank buys government bonds from banks in the open market at a time t=2. All other variables are assumed to be constant (i.e. P=P1 =P2, Y=Y1=Y2). Assume that the equilibrium real interest rate is r1, and quantity demanded of real money is M1/P1.

2. Graph and explain how the following shifts the aggregate demand curve (AD) in no more than five sentences. Identify what variables, sectors, and/or markets are affected and their effects on aggregate real income, real output, or real GDP.

a. Personal taxes decrease

3. Discuss the impact of an expansionary fiscal policy by the government on the aggregate demand curve, equilibrium real GDP, and equilibrium aggregate price level in no more than five sentences. Provide a graph to support your answer.