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The Federal Reserve has decided to decrease the money supply in response to recent policies pursued by congress. Assuming that the U.S. economy is

 

The Federal Reserve has decided to decrease the money supply in response to recent policies pursued by congress. Assuming that the U.S. economy is initially at its long-run equilibrium, use the IS-LM model and Aggregate Demand and Aggregate Supply model to graphically demonstrate the short-run and long run effects of a decrease the money supply. Label the axes, curves, initial long-run equilibrium, short-run equilibrium, and final long-run equilibrium. a. Explain what happens to price, output, interest rate, unemployment, investment, and consumption in the short-run. b. Explain what happens to price, output, interest rate, unemployment, investment, and consumption as the economy transitions from the short-run to the long-run.

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