Consider an exogenous increase in real money demand (e.g., a substantial decrease in credit card usage) in a closed econ

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answerhappygod
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Consider an exogenous increase in real money demand (e.g., a substantial decrease in credit card usage) in a closed econ

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Consider an exogenous increase in real money demand (e.g., a substantial decrease in credit card usage) in a closed economy. Assume that prices are fixed in the short run. Also assume that there are no changes in long-run aggregate supply.
(a) Will the interest rate increase in the short run?
(b) Will income increase in the short run?
(c) Will the price level increase in the transition from the short run to the long run (absent any policy response)? For future reference, denote the resulting long-run price level by P*.
(d) Now, assume that there was a policy response. In particular, the government intervened in order to stabilize OUTPUT in the short run.
(i) Assuming no change in tax revenue, did the government intervention involve an increase or a decrease in government spending?
(ii) Will the long-run price level (following the government's intervention) end up greater, smaller, or equal to P*?
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