Question

Consider the following extended classical economy (in which the misperceptions theory holds): AD Y=300+10(M/P) SRAS Y= Y +P − Pᵉ

Full-employment output = 500 Natural unemployment rate uˉ = 0.06
a. Suppose that the money supply M=1000 and that the expected price level Pᵉ = 50. What are the short-run equilibrium values of output Y and the price level P ? What are the long-run equilibrium values of these two variables?

Answer 1

The short-run equilibrium values of output (Y) and price level (P) can be calculated using the AD and SRAS equations. The long-run equilibrium values of Y and P can be determined by the intersection of the LRAS curve with the AD curve.

Step-by-step explanation:

In the short run, the equilibrium values of output (Y) and price level (P) can be calculated using the aggregate demand (AD) and short-run aggregate supply (SRAS) equations. Given that the money supply (M) is 1000 and the expected price level (Pᵉ) is 50, we can substitute these values into the equations to find the equilibrium: AD Y = 300 + 10(M/P) and SRAS Y = Y + P - Pᵉ. Solving these equations will give us the short-run equilibrium values of Y and P.

In the long run, the full-employment output is 500, and the natural unemployment rate (uˉ) is 0.06. The long-run equilibrium values of Y and P can be determined by the intersection of the long-run aggregate supply (LRAS) curve with the AD curve.