Consider a closed economy. Assume that goods prices are fixed in the short-run and that firms produce whatever they need to meet demand. Assume that money demand is negatively related to the nominal interest rate and positively related to the level of output. Consumption depends on current disposable income and the real interest rate.
Speculate on what would happen to equilibrium output, price level, consumption, investment, and nominal and real interest rates if:
a. There is a one-time increase in money supply.
b. Government expenditures rise but taxes remain unchanged.
c. Firms become optimistic about the future and increase their investment expenditures.
d. Households decide that they want to hold more dollars (money).
e. Taxes rise (keeping government expenditures constant).