1. Assume the central bank increases the quantity of money by 25%, even though the economy is initially in both short-run and long-run macroeconomic equilibrium. Describe the effects, in the short run and in the long run (giving numbers where possible), on the following.
Aggregate output
Aggregate output rises in the short run, then falls back to equal potential output in the long run.
Aggregate price level
The aggregate price level rises in the short run, but by less than 25%. It rises further in the long run, for a total increase of 25%.
Interest rate
The interest rate falls in the short run, then rises back to its original level in the long run.