1. Suppose the economy is operating at Y_n. Now suppose the Fed conducts a monetary policy contraction where the nominal money supply falls.
   1. Graph the effect of the Fed's action. Illustrate the initial equilibrium, dynamic adjustment, and medium-run equilibrium.
   2. Identify the initial effects on P, M/P, i, I, and Y.
   3. What is the medium-run impact on the AS curve and why?
   4. Does Y return to Y_n? And if so, what does this suggest about P and P^ein the medium run?
2. Blanchard makes the case that in the medium-run, the negative effect of a cut in the federal budget is neutralized (meaning no negative effect on output and employment). Why? Do you agree with him and if not, explain some circumstances under which the economy might not return to Y_n after a budget cut.