Given the results from the infamous paper by Milton Friedman and Anna Schwartz, "A Monetary History of the United States, 1867-1960," the economics profession had to acknowledge the fact that money leads output and that in the short run at least, money and real output are positively correlated.

• Draw a money market diagram, an IS/LM, and an AS / AD diagram (please label completely with relevant shift variables in parentheses) starting at an initial equilibrium point A in both diagrams (where r = r_a, Y = Y_a, P = P_a. etc.).
• Now discuss how the real business cycle economists (RBC) addressed this empirical reality (explain using your diagrams) that money is leading and pro-cyclical. Be specific and explain exactly why the Fed behaves the way they do (hint, storm windows) and what would happen exactly, if the Fed was passive and did nothing. At the end of your essay, please state how RBC economists explain the business cycle (recurrent fluctuations in output) as well as their thoughts on whether or not policymakers should conduct active countercyclical policy.