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Please Help with this Economics Question?

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

1. If the economy is initially in long run equilibruim, please calculat the equilibrium value of P and Y in the long run?

2. Now suppose a supply shock moves the short run aggregate supply curve to P=1.5. Please calculate the new short-run equilibrium for P and Y.

3. Suppose that after the supply shock the fed 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

If anyone could help with any part of this question I would really appreciate this. I have no clue how to do. Pleasssse help.

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2 ANSWERS


  1. 1:Longrun equilibrium:

    Aggregate Demand=3(M/P)=3000/P

    Aggregate Supply Y=3000

    Equilibrium requires equality of Aggregate Demand and Aggregate Supply So, 3000=3000/P ie. P=1 and hence Y=3000

    Equlibrium values:: Y=3000 P=1.0

    2: With P=1.5, Y=3(M/P)=3000/1.5 = 2000

    Short run Equilibrium values are Y=2000 and P=1.5

    3: Y=3000 , Y=3(M/P), P=1.5 . So for equlibrium

    3000=3*M/1.5 or, 3000*1.5/3=M or, M=1500 = the level of M requred for longrun output level to be maintained. Equlibrium values are M=1500, P=1.5 and Y=3000


  2. 1:

    Y=3(M/P)=3000/P (demand)

    Y=3000 (supply)

    Equilibrium:

    3000=3000/P

    P=3000/3000=1.0

    Y=3000

    Answ: Y=3000 P=1.0

    2:

    P=1.5 (short-run supply)

    Y=3(M/P)=3000/P (demand)

    Equilibrium:

    Y=3000/1.5=2000

    P=1.5

    Answ: Y=2000 P=1.5

    3:

    Y=3000 (long-run output)

    Y=3(M/P) (demand)

    P=1.5 (short-run supply)

    3000=3*M/1.5

    3000*1.5/3=M

    M=1500

    P=1.5

    Y=3000

    Answ: Y=3000 P=1.5 M=1500

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