The principal method used by the Federal Reserve to change the money supply is through open-market operations. Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of a Federal Reserve decision to increase open-market purchases.

Be sure to label:

i. the axes;
ii. the curves;
iii. the initial equilibrium values;
iv. the direction the curves shift;
v. the short-run equilibrium values; and
vi. the long-run equilibrium values.)

State in words what happens to prices and output in the short run and the long run.