Suppose the public believe the risk of holding non-monetary assets has increased and they want to hold a larger portion of their wealth in the form of money.

Use the AS-AD model the answer the following questions and support your answer by ONE AS-AD diagram in, and be sure to show the shift(s) of curve(s) and identify the new equilibriums in the diagram.

a)What happens to the short-run equilibrium levels of output and price?Explain.

b)What happens to the long-run equilibrium levels of output and price?Explain.

c)If the policy makers find the changes in the short-run level of output undesirable and wants to use fiscal policy to smooth out the business cycles.What should they do?Explain.