1. Suppose a computer virus disables credit card terminals at retail shops. As a result, people want to keep more cash on hand.

a. Using a money market diagram, determine if the money demand curve or money supply curve shifts, and determine what happens to the interest rate.

b. Does the computer virus cause a shift of the aggregate demand, or a movement along the aggregate demand curve? Draw an AD/AS diagram which is initially in long-run equilibrium, and indicate if there is an inflationary or recessionary gap, labeling this in your diagram

c. Right after the computer virus hits the terminals, the Fed decides to act quickly to stabilize aggregate demand. Determine if the Fed will buy or sell bonds, and illustrate the effects on both your diagram from part (a) and (b).