Suppose the Fed reduces the money supply by 5 percent. Assume the velocity of money is constant.

a. What happens to the aggregate demand curve?

b. What happens to the level of output and the price level in the short run and in the long run? Give a precise numerical answer.

c. In light of your answer to part (b), what happens to unemployment in the short run and in the long run according to Okun’s law?

Again, give a precise numerical answer.

d. What happens to the real interest rate in the short run and in the long run? Here, your answer should just give the direction of the changes.