Yf Identify one action the central bank can take to help the economy recover from the recession. Draw a correctly labeled graph of the money market, and show the impact of the central bank’s action identified in part (b) on the nominal interest rate.

Assume a country’s economy is currently in recession.

1. Draw a correctly labeled graph of the long-run aggregate supply, short-run aggregate supply, and aggregate demand curves, and show each of the following.

   1. Current real output, labeled Y₁, and current price level, labeled PL₁

   2. Full employment output, labeled Y_f

2. Identify one action the central bank can take to help the economy recover from the recession.

3. Draw a correctly labeled graph of the money market, and show the impact of the central bank’s action identified in part (b) on the nominal interest rate.

4. On your graph for part (a), show the effect of the central bank’s action identified in part (b) on real output and the price level.

5. Assume there is an increase in business confidence as a result of the central bank’s action.

   1. What will happen to the demand for capital goods?

   2. Draw a correctly labeled graph of the loanable funds market, and show the effect of the change identified in part (e)(i) on the real interest rate.

6. Given your answer to part (e), what is the effect on potential real output in the long run? Explain.