Question: Suppose the economy is in long-run equilibrium, with real GDP at $16 trillion and the unemployment rate at 5%. Now assume that the central bank increases the money supply by 6%.
a. Illustrate the short-run effects on the macro economy by using the aggregate supply-aggregate demand model. Be sure to indicate the direction of change in real GDP, the price level, and the unemployment rate.
b. Illustrate the long-run effects on the macro economy by using the aggregate supply- aggregate demand model. Again, be sure to indicate the direction of change in real GDP, the price level, and the unemployment rate.
c. Now assume that this monetary expansion was completely expected. Illustrate both short-run and long-run effects on the macro economy by using the aggregate supply- aggregate demand model. Be sure to indicate the direction of change in real GDP, the price level, and the unemployment rate.