Monetary Policy in the Long Run 8: Phillips Curve Practice Part 1: Monetary Policy in the Long Run 1. Effects of Exlwansionary Monetary Policy a. b. C. d. e. Draw an AD-AS graph showing long-run equilibrium. Draw a money market graph. Show and explain how expansionary monetary policy would impact interest rates? Using the graph in part a, show how the change in interest rates would affect the AD/AS model. Explain. Explain how real GDP and price level would be affected by the change in interest rates in the short-run. Using your graph in part 1, show how SRAS will be impacted the change in interest rates in the longrun? Explain. 2. Interest Rates in the Long Run a. b. Draw a money market graph showing equilibrium interest rate (r1) and equilibrium quantity (QMl). Using the money market graph you drew in question a, show and explain what will happen to equilibrium interest rate if the money supply increases by 10%? According to money neutrality, how will this change in the money supply impact the long run aggregate price level? Using the money market graph you drew in question a, show and explain why the price level you identified in question c will impact the money market. 3. Assume an economy is in long-run equilibrium. a. Draw a correctly labeled graph of aggregate demand and supply of this economy. b. Draw a correctly labeled graph of equilibrium in the money market. c. On your graph in part (b), show what happens to the money market in the short run if the central bank decreases the money supply. d. On your graph in part (a), show what happens to the macroeconomy in the short run if the central bank decreases the money supply. e. On both graphs, show what will happen in the long run. Explain these adjustments