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Classical model
a. Draw IS-LM-FE, AS-AD, and labor market graphs. Label initial equilibrium points assuming the economy is initially at full employment.
b. Assume that there is a decrease in current productivity which is expected to vanish before next period. Use the graphs you drew in part (a) to illustrate the effects on output, interest, prices, employment, and the wage. Label new equilibrium points. Describe below why curves shift.
c. Assume that you are in charge of monetary policy in this country and that you do not want prices to change. How would you use monetary policy to keep prices from changing? Explain what would happen to the money supply and draw below on new IS-LM-FE and AS-AD graphs below.
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