Assume a country's economy is at full employment and in equilibrium on the AD/AS graph. The central bank of this country conducts an open market sale of government bonds.

a. Explain how the sale of bonds on the open market will affect each of the following

(i) Money Supply

(ii) Interest Rates

b. Indicate whether the interest rate you identified in part (a-II) is nominal or real interest rates?

c. Under what condition will the nominal interest rate differ from the real interest rate?

d. Explain the short term effect of the open market operation sale, on each of the following:

(i) Real Output

(ii) Price level

e. Imagining a Phiilip's Curve, explain how the open market sale of bonds, effect the following in the short run:

(i) Unemployment rate

(ii) Inflation rate

f. Identify one fiscal policy action that would offset the impact on real output and price level that you identified in (d)