Problem
Graphically show and link the long-run equilibrium in goods market and money market, using MD-MS diagram, Investment Expenditure diagram, AE-Y diagram, and AD-AS diagram.
I. Clearly explain (using chain reactions) and show the short-run effect of an increase in money supply on the equilibrium of this economy. Make sure you clearly show the impact in all diagrams.
II. In the same way, explain and show the long-run effect of the increase in money supply noting that your answer to this question picks up where you finished in part (I) and describes the adjustment process according to the output gap.
III. Clearly describe based on your graphs, the long-term neutrality of money.
IV. Is the composition of Y* any different after the new long-run equilibrium establishes?