Reference no: EM13199425
Using the Keynesian AD-AS model; suppose that there is a sudden decrease in the money supply.
HINT(S): Recall that the Keynesians use a short-run aggregate supply curve too; and that changes in the money supply impact aggregate demand.
(a) Show graphically what happens in the short-run and in the long-run. Be sure to label your graph correctly for full credit. Write the graph clearly and neatly. If you want to, describe what happens too.
(b) Does output, Y increase, decrease, or stay the same in the short-run?
(c) In the long-run, what happens to the aggregate (or average) price level, P? Does it increase, decreases, or return to its starting point?
(d) In the long-run does output, Y increase or decrease relative to its initial value (i.e., the value before the money supply decrease)?
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