Question: This question asks you to compare the effects in monetary policy in the LR vs the SR. a. )Consider the LR and very LR where

This question asks you to compare the effects in monetary policy in the LR vs the SR.

a. )Consider the LR and very LR where monetary neutrality holds. Suppose there is a one-time increase in money supply (M). How does such increase in money supply affect the outcomes in the macroeconomy in the LR and very LR according to the classical model? Explain your answers. Plot log M and log P over time (from some time before the policy change to some time after the policy change) to illustrate the effect of such change in monetary policy in the LR and very LR.

b.) Consider the SR in the IS-LM model with completely sticky goods prices. Consider an increase in money supply (M). How does such increase in money supply affect the outcomes in the macroeconomy in the SR according to the IS-LM model? Show your graphical analyses and explain your answers.

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