Question

Please answer the questions completely and provide the apropriate mathematics and graphs.
1.

Suppose business firms collectively become pessimistic about prospects for future profits because of continued worries about terrorism. Explain how this would affect investment, aggregate demand, output, and the price level in the short run and the long run. Use an AS/AD graph to illustrate.

2-3 . Answer the questions below.

Suppose the Federal Reserve raises the federal funds rate in the United States but people

believe that the inflation rate will rise by more than the Fed raised the federal funds rate.

2. What do you expect to happen to the real interest rate and the exchange rate? Explain why.

3.As the exchange rate changes in the direction determined in part a, what happens to the prices of imports and exports in the United States and in other countries? Explain.

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