1.)    According to the 3-graph model, what happens to the real wage rate, employment. real interest rate, income, consumption, investment, and inflation when (Illustrate you answers with graphs.):

a)      The central bank increases the money supply? 

b)      The government increases government purchases?

c)       The government increases taxes?

2.)    Use the IS-LM diagram to describe the short-run and long-run impact on national income, the price level, and the interest rate of (Illustrate your answers with graphs.):

a)      An increase in the money supply.

b)      An increase in government purchases.

c)       An increase in taxes.

3.)    Use the AD-ASdiagram to describe the short-run and long-run impact on national income adn the price level when (Illustrate you answers with graphs.):

a)      An increase in the money supply.

b)      An increase in government purchases.

c)       An increase in taxes.

4.)    The Fed is considering two alternative monetary policies:

·         Holding the money supply constant

·         Adjusting the money supply to hold the interest rate constant

In the IS-LM model, which policy will better stabilize output if

a)      All shocks to the economy arise from exogenous exchanges in the demand for goods and services?

b)      All shocks to the economy arise from exogenous exchanges in the demand for money?