2.

(04.01-04.07 HC) For all graphs, be sure to correctly and completely label all axes and curves and use arrows to indicate the direction of any shifts. (5 points) Assume that an economy is in a short-run macroeconomic equilibrium and experiences a negative demand shock.

1. What will happen to real output and the price level as a result? Explain.
2. Using a correctly labeled graph of the money market, illustrate the impact of the negative demand shock.
3. What will happen to the price of previously issued bonds? Explain.
4. What is one policy action that the central bank could take to offset the change in the nominal interest rate from part (b)?
5. Assume that the required reserve ratio is 10 percent. If the central bank wants to increase the money supply by $20 billion, what is the specific open-market operation (type and minimum value) that the central bank needs to conduct?