1. Suppose a central bank has increased its nation's nominal money supply considerably for several years in a row, but without any increase in inflation. Over the same time, suppose its economy has not grown. Given this information, explain why this monetary policy has not yielded any results. Use the aggregate demand/aggregate supply (AD/AS) model to aid in your answer, and assume the economy is in a long-term equilibrium as your starting point. A good approach would be to compare what is supposed to happen to AD when the Fed conducts expansionary monetary policy to this situation.

2. Assume the economy is initially in a long-term equilibrium. Suppose Congress and the president decide to reduce the budget deficit by making 10 percent across-the-board cuts to every government program tomorrow (and for the record, 10 percent is a very big number in this context). Use the AD/AS model to describe the effect this policy will have on inflation and real GDP in the short run and the long run.