2. Answer True or False. Explain your answer. [35 points]

a)(20 points) Explain if the following statement is true or false: "In the short run, a temporary decrease in the real demand of money does not affect the level of output if the country has a fixed exchange rate but decreases the level of output when the country has a flexible exchange rate."

Assume that all other things remain equal. Do not forget toEXPLAINwhy the curves change and why the variables change. Use a graph of the AA-DD model to support your answer.

b)(15 points) Explain the following statement is true or false: "Suppose Argentina is FIXING its currency (the peso) to the US dollar.Then, a decrease in the Money Supply in the US (foreign country) will induce a decrease in the Money supply in Argentina."

Assume that all other things remain equal. Do not forget toEXPLAINwhy the curves change and why the variables change. Use a graph of the AA-DD model to support your answer.

This is the information given......