1. Describe how an increase in taxes would affect the IS-LM AS-AD model (assume sticky wages and a non-vertical AS curve).
2. Be sure to graph the initial state of the model and show the shock to the economy. Assume the decrease can be modeled as a short-run demand shock (do not include a potential supply shock). Note what happens to output, prices, and interest rates in the short run.
3. Describe the likely response of the central bank to the shock.
4. Describe what would happen in the long run if no monetary policy were enacted.