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[Solution] Equilibrium

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.a.If the economy is initially in long-run equilibrium, what are the values of P and Y? Illustrate your answers in a diagram.b. Now suppose a supply shock moves the short-run aggregate supply curve to P = 1.5. What are the new short-run P and Y? Illustrate your answers in diagram?c. If the aggregate demand curve and long-run aggregate supply curve are unchanged, what are the long-run equilibrium P and Y after the supply shock? Illustrate your answers in a diagram’d. Suppose that after the supply shock the central 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? Illustrate your answers in a diagram? For more information on Equilibrium read this: https://en.wikipedia.org/wiki/Equilibrium

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.a.If the economy is initially in long-run equilibrium, what are the values of P and Y? Illustrate your answers in a diagram.b. Now suppose a supply shock moves the short-run aggregate supply curve to P = 1.5. What are the new short-run P and Y? Illustrate your answers in diagram?c. If the aggregate demand curve and long-run aggregate supply curve are unchanged, what are the long-run equilibrium P and Y after the supply shock? Illustrate your answers in a diagram’d. Suppose that after the supply shock the central 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? Illustrate your answers in a diagram? For more information on Equilibrium read this: https://en.wikipedia.org/wiki/Equilibrium

 

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