Consider a stock market boom (exogenous increase in consumption and/or investment) in a closed economy. Assume that prices are fixed in the short run.

(a) Will the interest rate increase in the short run?

(b) Will income increase in the short run?

(c) Will the price level increase in the transition from the short run to the long run (absent any policy response)? For future reference, denote the resulting long-run price level by P*.

(d) Now, assume that there was a policy response. In particular, the central bank intervened in order to stabilize the interest rate in the short run.

(i) Did it increase or decrease the money supply?

(ii) Will the long-run price level (following the central bank's intervention) end up greater, smaller, or equal to P*.