Suppose that the economy is initially at a long-run equilibrium. Then the central bank increases the money supply.
a. Assuming any resulting inflation to be unexpected, explain any changes in GDP, unemployment, and inflation that are caused by the monetary expansion. Explain your conclusions using three diagrams: one for the IS–LM model, one for the AD–AS model, and one for the Phillips curve.
b. Assuming instead that any resulting inflation is expected, explain any changes in GDP, unemployment, and inflation that are caused by the monetary expansion. Once again, explain your conclusions using three diagrams: one for the IS–LM model, one for the AD–AS model, and one for the Phillips curve.