I.Short Answer (20 pts each)

1.AS-AD Model

A.Draw a graph of equilibrium in the aggregate supply/aggregate demand model; be sure to include an AD curve, a SRAS curve and a LRAS curve. Label the equilibrium inflation rate and the equilibrium GDP growth rate. (5 pts)

B.Graph and briefly describe the effect of a sudden decrease in velocity in the short and long run. (5 pts)

C.Assuming the central bank responds to the decrease in velocity by increasing the money supply, describe the effects of this policy in the short and long run. (5 pts)

D.Assuming alternatively the central bank does nothing to address the decrease in velocity, describe the effects of this policy in the short and long run.(5 pts)