1a) Discuss the effects of a tightening monetary policy in the short-run and the long-run? What are the key assumptions in both scenarios? What are the appropriate models to distinguish the short run and long-run effects of a tightened monetary policy?
b) What exactly does the Federal Reserve do when it announces a policy to tighten money supply?
c) What is the effect of such a monetary policy on the equilibrium level of income in the short run? Depict this using the ISLM curves. Comment on the effect on Investment, Consumption and Unemployment resulting from a tightening monetary policy.
d) How does this monetary policy affect aggregate demand in the economy? Show this graphically.