Question

Assume that the long-run aggregate supply curve is vertical at Y = 1,200 while the short-run aggregate supply curve is horizontal at P = 1. The aggregate demand curve is Y = 3 (M/P) and M = 400 . a. If the economy is initially in long-run equilibrium, what are the values of P Number and Y Number b. If M changes to 450 , what are the new short-run values of P Number and Y Number c. Once the economy adjusts to long-run equilibrium at M =450 what are P Number and Y Number

Answer 1

In the long-run equilibrium, the output level is 200 and the price level is 90. With an increase in M to 450, the new short-run equilibrium has an output level of 206 and a price level of 92. Once the economy adjusts to long-run equilibrium at M = 450, the output level is 212 and the price level is 94.

Step-by-step explanation:

In the initial long-run equilibrium, the economy is at point Eo where the aggregate demand curve (AD) intersects with the short-run aggregate supply curve (SRAS) and the long-run aggregate supply curve (LRAS) at an output level of 200 (Y = 200) and a price level of 90 (P = 90). Since the long-run aggregate supply curve is vertical, changes in aggregate demand do not affect the level of output, only the price level.

When M changes to 450, the new short-run equilibrium occurs at point E1. The aggregate demand curve shifts to AD1, intersecting with the short-run aggregate supply curve at an output level of 206 (Y = 206) and a higher price level of 92 (P = 92).

Once the economy adjusts to long-run equilibrium at M = 450, the aggregate supply curve shifts to SRAS2 and the aggregate demand curve shifts to AD2. The new equilibrium is at point E2, with an output level of 212 (Y = 212) and a price level of 94 (P = 94).