Question

3. Use the classical model of a closed economy and the quantity theory of money to predict how each of the following shocks would affect real aggregate income (Y), the real interest rate (r), and the price of goods and services (P) in a closed economy in the long run, all else equal. For each shock, be sure to clearly state a prediction for all three variables (up, down, or no change) and illustrate your predictions with supply/demand diagrams for the goods market and the loanable funds market.

1. A decrease in supply of capital (KS down).

2. An increase in the income velocity of money (V up).

I mostly need help understanding how to draw the graphs

Answer 1