1. Using the IS-LM model, answer the following questions:

(a) With the appropriate figure, show how a decrease in the nominal money supply, M , changes real income and the interest rate. How do investment and consumption change? Explain. (b) Suppose that the price level now changes sufficiently to bring income back to the level that prevailed before the decrease in the nominal money supply. Use you diagram to show this change. How did the price level change (i.e. increase or decrease)? How to the new equilibrium values of consumption and investment compare to the values in equilibrium before the money supply decreased?