C. Assume that the long-run aggregate supply is given Y = (2K^1/2)*(L^1/2) , while the short-run aggregate supply curve is horizontal at P = $1.0. The aggregate demand curve is Y = 5*(M/P), and money supply is M = $1,000. Assuming that the economy�s L = K = 2,500,
answer the following questions:
1. What is the income velocity, V?
2. If the economy is initially in long-run equilibrium, what are the values of P and Y?
3. Suppose the aggregate demand curve becomes Y = 3*(M/P).
a. What is the income velocity, V?
b. What are the short-run values of P and Y?
c. With the new aggregate demand function, once the economy adjusts to its long-run equilibrium, what are the values of P and Y?
d. Draw a diagram showing how economy moves from its initial long-run equilibrium (found in part 2), to the short-run equilibrium (found in part 3.b.), and then back to the long-run equilibrium (found in part 3.c)
4. Now, instead of changing the aggregate demand, assume that the Fed decreases money supply from M = $1,000 to M = $400.
a. What are the short-run values of P and Y?
b. With the new aggregate demand function, once the economy adjusts to its long-run equilibrium, what are the values of P and Y?
c. Draw a diagram showing how economy moves from its initial long-run equilibrium (found in part 2), to the short-run equilibrium (found in part 4.a.), and then back to the long-run equilibrium (found in part 4.b).
C. Assume that the long-run aggregate supply is given Y = (2K^1/2)*(L^1/2) , while the short-run aggregate supply curve is horizontal at P = $1.0. The aggregate demand curve is Y = 5*(M/P), and money supply is M = $1,000. Assuming that the economy�s L = K = 2,500,
answer the following questions:
1. What is the income velocity, V?
2. If the economy is initially in long-run equilibrium, what are the values of P and Y?
3. Suppose the aggregate demand curve becomes Y = 3*(M/P).
a. What is the income velocity, V?
b. What are the short-run values of P and Y?
c. With the new aggregate demand function, once the economy adjusts to its long-run equilibrium, what are the values of P and Y?
d. Draw a diagram showing how economy moves from its initial long-run equilibrium (found in part 2), to the short-run equilibrium (found in part 3.b.), and then back to the long-run equilibrium (found in part 3.c)
4. Now, instead of changing the aggregate demand, assume that the Fed decreases money supply from M = $1,000 to M = $400.
a. What are the short-run values of P and Y?
b. With the new aggregate demand function, once the economy adjusts to its long-run equilibrium, what are the values of P and Y?
c. Draw a diagram showing how economy moves from its initial long-run equilibrium (found in part 2), to the short-run equilibrium (found in part 4.a.), and then back to the long-run equilibrium (found in part 4.b).
