Box 1 Consider an economy with an upward sloping (not vertical) short run AS curve, a vertical long run AS curve, and a downward sloping AD curve. Consumption and savings do not respond to the real interest rate. The economy is initially in long run equilibrium. Consider the following points in time: Time 0: Before anything happens. Time 1: There is a permanent rise in investor condence, i.e. at every level of r, 1(r) increases. Short run equilibrium is reached in both the market for output and the market for money and bonds. Time 2: The short run AS curve shifts and a new, long run, equilibrium is reached where AD : AS at full employment output. 2. Refer to Box 1. Between time 1 and time 2 the following changes occur: (a)ii,1,M/PT (b) itItM/PT (c) ithM/Pi (d) itItM/Pi (e) ii, IT,M/PT (f) 1T, IT,M/PT (g)ii,1i,M/Pi (h) it IT, M/Pi