$3.(20$ points$)$ The $1981-82$ recession was preceded by a sharp decrease in the nominal

money supply. Consider a close economy.

$($a$)(8$ points$)$ First, let$$s analyze this event from a real business cycle perspective

and assume that the classical dichotomy applies. Using the intertemporal model,

show graphically how a decrease in the nominal money supply would a$$ect output,

employment, real wages, the real interest rate and the price level. What happens

to consumption and investment?

$1$

$($b$)(10$ points$)$ Next, let$$s analyze this event from a Keynesian perspective. Using the

sticky price version of the Keynesian model, show graphically how a decrease in

the nominal money supply would a$$ect output, employment, real wages, the real

interest rate and the price level. What happens to consumption and investment?

Your answers should be for the short run, with the price level held $$xed$.$

$($c$)(2$ points$)$ Under which perspective, the classical or Keynesian, is it more plausible

to conclude that the $1981-82$ recession was caused by a money supply decrease?

Brie$$y explain.