The Federal Reserve has decided to decrease the money supply in response to recent policies pursued...

 

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The Federal Reserve has decided to decrease the money supply in response to recent policies pursued by congress. Assuming that the U.S. economy is initially at its long-run equilibrium, use the IS-LM model and Aggregate Demand and Aggregate Supply model to graphically demonstrate the short-run and long run effects of a decrease the money supply. Label the axes, curves, initial long-run equilibrium, short-run equilibrium, and final long-run equilibrium. a. Explain what happens to price, output, interest rate, unemployment, investment, and consumption in the short-run. b. Explain what happens to price, output, interest rate, unemployment, investment, and consumption as the economy transitions from the short-run to the long-run. The Federal Reserve has decided to decrease the money supply in response to recent policies pursued by congress. Assuming that the U.S. economy is initially at its long-run equilibrium, use the IS-LM model and Aggregate Demand and Aggregate Supply model to graphically demonstrate the short-run and long run effects of a decrease the money supply. Label the axes, curves, initial long-run equilibrium, short-run equilibrium, and final long-run equilibrium. a. Explain what happens to price, output, interest rate, unemployment, investment, and consumption in the short-run. b. Explain what happens to price, output, interest rate, unemployment, investment, and consumption as the economy transitions from the short-run to the long-run.