Consider an economy at Full-potential: Suppose the Real Money Demand function is given by L(Y,i) = 1000+0.5Y - 500i Assume the market for money is in equilibrium, & that initially: Y = 7000 (i.e. full-potential = 7000), r=2 (2%), ^e =1 (1%), and P=4 Use the Fisher Equation: i=r+^e Remark: In your calculations below use r=2 & ^e =1 in your equations; do not convert to decimals. a) Calculate the real money demand (give #). Show work. b) Solve for nominal money supply (give #). Show work. c) Now consider the impact of a shock: Suppose that higher labor force participation causes a rise in full-potential, so that Y=8000 and r falls to 1 (1%); assume there is no impact on inflation expectations. What is the impact of this shock on the price level? Calculate the new Price Level (give #); show work. Again, use r=1 in your calculations. d) What can you conclude about the impact that a positive "supply shock" (i.e. shock to supply) has on the price level? State briefly. Note: for part c: Redo the calculation in part a. and then solve for the new Price Level (P)