The Federal Reserve decreases the money supply by 5 percent. Use the theory of liquidity preference to illustrate the impact of this policy on the interest rate on the following graph. Interest Rate Money Supply Quantity of Money Money Demand Money Demand Money Supply Use the model of aggregate demand and aggregate supply to illustrate the impact of this change in the interest rate on output and the price level in the short run. Price Level LRAS Aggregate Supply Aggregate Demand Quantity of Output Aggregate Demand - Aggregate Supply LRAS (?) Which of the following will happen when the economy makes the transition from its short-run equilibrium to its long-run equilibrium? (Note: Do not adjust the graphs to reflect the transition to the long run.) Check all that apply. The price level will fall. The demand for money will fall. The equilibrium interest rate will rise. Is this analysis consistent with the proposition that the money supply has real effects in the short run but is neutral in the long run? Yes No