1. The quantity theory of money, can be used to show what relationship between P, M and Y?

a. Inverse relationship between P and M, given Y

b. Inverse relationship between P and Y, given M

c. Positive or direct relationship between P and Y, given M

d. None of the above

2. Sticky prices give us what type of supply curve?

a. Long run horizontal supply curve

b. Long run vertical supply curve

c. Short run horizontal supply curve

d. Short run vertical supply curve

3. The long run aggregate supply curve (LRAS) implies that unemployment is

a. At the natural rate

b. The sum of structural and frictional unemployment

c. Both (a) and (b)

d. None of the above

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9 May 2018

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a) Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y = 2(M/P) and M = 1,500.

i) If the economy is initially in long-run equilibrium, what are the values of P and Y?

ii) What is the velocity of money in this economy?

b) Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y = 3(M/P) and M = 1,000.

i) Suppose a supply shock moves the short-run aggregate supply curve to P=1.5. What are the new short run P and Y? What will be the new long run P and Y?

ii) Suppose that immediately after the supply shock the Federal Reserve Bank wanted to hold output at its long-run level. What level of M would be required? If this level of M were maintained, what would be long-run equilibrium P and Y?

iii) If M increases to 2,000, what are the new short-run values of P and Y?

iv) Once the economy adjusts to long-run equilibrium at M = 2,000, what are P and Y?

c) Use the aggregate demand

bronzehamster418

A) Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = $1.0. The aggregate demand curve is Y = 2(M/P) and M = 1,500.

i) If the economy is initially in long-run equilibrium, what are the values of P and Y?

ii) What is the velocity of money in this economy?

iii) If M increases to 2,000, what are the new short-run values of P and Y?

iv) Once the economy adjusts to long-run equilibrium at M = 2,000, what are P and Y?

B) Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = $1.0. The aggregate demand curve is Y = 3(M/P) and M = 1,000.

i) Suppose a supply shock moves the short-run aggregate supply curve to P=$1.5. What are the new short-run P and Y? What will be the new long-run P and Y?

C) Use the aggregate demand/aggregate supply model to illustrate graphically the impact in the short run and the long run of the following changes. (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). Also, state what happens to prices and output in the short run and the long run.

i) The Federal Reserve Bank engages in expansionary monetary policy.

ii) Climate change causes reduced food production.

iii) Labor unions are banned.