An economy is initially in long-run equilibrium. Suppose that increased risk in financial markets dramatically increases the demand for money in the economy. Use the IS-LM and AD-AS models and assume price rigidity to answer the following questions.

a. What is the short-run impact on the real interest rate, price level and output?

b. What can the central bank do, if anything, to counteract the short-run changes in the real interest rate, price level, and output?

c. If the central bank does not take any policy actions, what will be the long-run impact on the real intertest rate, price level, and output?