Given that the Fed has increased money supply considerably in the last few months (and, therefore, decreased interest rates):

Part II: Use analysis to explain how the economy adjusts over time from the short run to the long run. More specifically:

(d) What is the economic variable that links the short run and long run? What happens to this key economic variable over time given the above monetary policy?

(e) Draw the aggregate demand and the corresponding aggregate supply curves in the short run and in the long run. Show the changes implied by this policy in the short run and in the long run. Be sure to label the graphs and show the path the economy takes in the long run. (3 points)

(f) What is the effect of the change in the key variable you found in item (d) on real money balances? What happens to the LM curve? Draw this effect on the IS-LM diagrams.

(g) What is the final effect in the long run on interest rates? And on income and output? And on prices

(h) Explain what the "Classical dichotomy" or "money neutrality" means.

(i) Now that you know the impact of this expansionary monetary policy in the short run and in the long run, explain the advantages and disadvantages of this policy.