Answer the following question. Graphs not drawn to scale

1. Suppose the money supply is 100, the velocity of money is 3, the price level is 5 and real GDP is 60. An unanticipated increase in the money supply to 200 increases GDP to 100 in the short run, but then real GDP returns to 60 on the long run. Assuming the velocity of money remains constant, what will happen to prices in the short run? In the long run? LRAS SRI 2. DI AD M YE Money Balances Loanable Funds Market Real GDP The graphs above illustrate the macroeconomy initially in equilibrium at the real GDP level Y price level of P, and real interest rates of I and r respectively. a. Suppose the Fed conducts an open market sale of bonds. Show the short-run impact of this sale in the money balances and loanable funds markets. Briefly explain the changes you make in the diagrams. (Assume the policy is unanticipated) Now show the short-run impact of these changes on real GDP and the price level in the AD/AS model at the far right. Again, explain briefly the changes you make in the diagram. 3. An expansion in the money supply eventually results in an increase in aggregate demand. Discuss the possible means by which the increase in the money supply is transmitted to the economy in this matter. (5 poks) 4. How does the emergence of new forms of money for example, debit cards and electronic payments, affect the demand for money and the effectiveness of monetary policy? (5 gobs) 5. Explain the Phillips curve. a. An increase in AD would lead to a point on the Phillips Curve with unemployment and inflation. b. A decrease in AD would lead to a point on the Phillips Curve with unemployment and inflation