1.Suppose that, in a world with on ongoing inflation, the government raises taxes. Using AD and AS curves.

a.Describes the effects on the economy if the central bank decides to keep the money supply constant. Make sure that you will analyze both long run and short run effects, assuming that the economy starts at its long-run equilibrium. (6 points)

b.Alternatively, how could the central bank use active policy to neutralize the demand shock? Please name the policy and describe the short run and long run effects of the policy. (6 points)

c.If election is coming, will politians adopt the policy you suggested in part b, why and why not. (3 points)