Please solve questions, and shift the graphs where it needs to be.

2.

2. Problems and Applications Q2 The Federal Reserve decreases the money supply by 5 percent. On the following graph, use the theory of liquidity preference to illustrate the impact of this policy on the interest rate. Money Supply O Money Demand Money Supply Interest Rate Money Demand Quantity of MoneyOn the following graph, use the model of aggregate demand and aggregate supply to illustrate the impact of this change in the interest rate on output and the price level in the short run. LRAS 0 Aggregate Supply Aggregate Demand El Aggregate Supply E E j - - - - - - -+ A .9 I n. I LRAS I I : Aggregate Demand I I I I Quantity of Output Which of the following will happen when the economy makes the transition from its shortrun equilibrium to its long-run equilibrium? (Note: Do not adjust the graphs to reflect the transition to the long run.) Check all that apply. C] The price level will fall. D The demand for money will fall. [3 The equilibrium interest rate will rise. Is this analysis consistent with the proposition that the money supply has real effects in the short run but is neutral in the long run? 0 Yes O No 11. Problems and Applications Q11 Consider an economy described by the following equations: Y=C+I+G C=100+0.75X(YT) I:50050xr G=125 T2100 where Y is GDP, C is consumption, I is investment, G is government purchases, T is taxes, and r is the interest rate. If the economy were at full employment (that is, at the natural rate of output), GDP would be $2,000. Identify the equation(s) each of the following statements describes. Check all that apply. Statement C I G It is an autonomous amount, independent of other factors. C] C] C] It is a function of disposable income. C] C] C] It depends on the interest rate. C] C] C] The marginal propensity to consume in this economy is :l. Suppose the central bank's policy is to adjust the money supply to maintain the interest rate at 4%, so r = 4. When the interest rate is 4%, GDP is |:]. GDP at an interest rate of 4% is V the full-employment level. Assuming no change in monetary policy, V in government purchases by I:] would restore GDP to the full-employment level. (Note: Assume that this change in fiscal policy has no crowdingout effect.) Assuming no change in fiscal policy, V in the interest rate by |:] % would restore GDP to the fullemployment level