2. Inflation in the Philippines was 6.7% in September, far above the central bank's target of 2 - 4%. Suppose the central bank decides to raise interest rates.

(a) Using the money market, describe the type of monetary policy (increase or decrease in the money supply) that would achieve higher interest rates.

(b) The central bank's goal is to reduce inflation. Using the IS-LM-FE model, explain whether the policy of higher interest rates is appropriate or not.

(c) Use the AD-AS model to predict the short-run and long-run effects of the central bank's policy on Philippine inflation, output, and unemployment. Does it matter whether wages are flexible or not? Explain.

(d) Suppose the demographic transition of the Philippines causes labor supply to grow more rapidly than usual. How does this affect your answer about unemployment and wages in (c)? Use the labor market.