In a closed economy with excess unemployment, assume the Fed is managing monetary policy by using an interest rate instrument, not controlling the supply of money.

a. Graph and explain the IS, LR, and FE lines.

b. In a new graph show and explain the effects on the IS, LR, and FE curve of a decision to implement an expansionary monetary policy.

c. Will the expansionary policy have a greater effect on real variables like unemployment and real income, or instead on the rate of inflation?