2. Suppose the Fed reduces the money supply by 5 percent.

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?

c. According to Okun’s law, what happens to unemployment in the short run and in the long run?

d. What happens to the real interest rate in the short run and in the long run? (Hint:

Use the model of the real interest rate in Chapter 3 to see what happens when output changes.)