Answer the following questions about the AS-AD model.

1. The aggregate demand and aggregate supply diagram has output on the horizontal axis and inflation on the vertical axis. Explain the derivation of the aggregate demand schedule from the IS schedule and monetary policy. Why is it downward sloping? Explain your answer mathematically.
2. What causes movements along the aggregate demand schedule? What happens to the aggregate demand schedule if government expenditure increases and tax revenue does not change? What happens to the aggregate demand schedule if the target inflation rate is increased?
3. What is the shape of the aggregate supply curve if prices and wages are completely flexible. What determines potential output?
4. Suppose that economy starts at a point where aggregate demand and short and long aggregate supply are all equal. The central bank then tightens monetary policy in order to reduce the rate of inflation. Use a diagram to discuss what happens to aggregate demand and supply in the short and long run.