1. For each of the following situations, describe how (if at all) the IS, MP, and AD curves are affected.

a. A decrease in financial frictions.

b. An increase in taxes and an autonomous easing of monetary policy.

c. An increase in the current inflation rate.

d. A decrease in autonomous consumption.

e. Firms become more optimistic about the future of the economy.

2. What evidence is used to assess the stability of the money demand function? What does the evidence suggest about the stability of money demand, and how has this conclusion affected monetary policymaking?

3. Why is Keyness analysis of the speculative demand for money important to his view that velocity will undergo substantial fluctuations and thus cannot be treated as constant?