a) An economy is using coal-fired power stations. New technology makes renewable energy sources much more cost effective. The government simultaneously introduces regulations that limit the use of polluting coal-fired power stations. Draw a labeled diagram to show the most likely effect of these developments on the credit market. What happens to the equilibrium interest rate? Show with an additional diagram how the credit market outcome is affected by the elasticity of savings with respect to the interest rate.

b) Why might the demand for money rise as a result of the events described in (A)? Why might it fall as a result of these events and given your analysis in (A)?

c) Assume that money demand falls and the money supply does not change, what happens to the price level? Draw a diagram to illustrate. What must happen to the velocity of circulation in this case?