Scenario: Suppose an economy is in equilibrium.

Scenario: Suppose an economy is in equilibrium.

a) Using aggregate demand and aggregate supply, illustrate the equilibrium. Do not forget to include the long-run aggregate supply.

b) Now suppose the central bank decided to increase the money supply in the economy. Using the theory of liquidity preference and the money market graph, illustrate what is going to happen to the aggregate demand.

c) Draw the new short-run equilibrium of the economy, as a result of the shift in aggregate demand you considered in part b). What will happen to the output in the short-run? What will happen to the price level in the short-run?

d) Assuming no government intervention, show the long-run equilibrium. How did the economy adjust to this new long-run equilibrium point? Explain why please.

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