• Include correctly drawn and labeled graphs and diagrams to support your answer where needed, even if the question does not specifically tell you to draw one.
• Separate and labelthe answer in the same manner in which the question is written. For example if there is a part A, B (i), B (ii), and C, your answer must have a part A, B (i), B (ii), and C.
• You may use standard economic abbreviations. RGDP for real GDP is fine.

The Question

Assume an economy operating below full employment.

1. Draw a correctly labeled AD/AS graph showing:
2. the problem in the economy
3. current price level and output
4. full employment output
5. Identify an open market operation that the Fed could implement to resolve the problem.
6. Using a correctly labeled money market graph with a side-by-side investment demand graph, show the effect of the policy you identified in part B on each of the following:
7. nominal interest rates
8. quantity of investment demanded
9. On your graph in part A, show the short-run effects of the action you identified on each of the following:
10. aggregate demand - explain why AD shifts
11. output
12. price level
13. Given your answer in part C, explain what will happen to each of the following:
14. the international value of the dollar
15. the nation's exports and imports