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Assume That the Long-Run Aggregate Supply Curve Is Vertical at Y

question 61

Short Answer

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.
A) If the economy is initially in long-run equilibrium, what are the values of P and Y?
B) What is the velocity of money in this case?
C) Suppose because banks start paying interest on checking accounts, the aggregate demand function shifts to Y = (1.5)(M/P). What are the short-run values of P and Y?
D) What is the velocity of money in this case?
E) With the new aggregate demand function, once the economy adjusts to long-run equilibrium, what are P and Y?
F) What is the velocity now?

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Definitions:

Processing Department

An organizational unit where work is performed on a product and where materials, labor, or overhead costs are added to the product.

Equivalent Units

A measure used in cost accounting to express the amount of work done by employees and machines in terms of fully completed units of output.

Ending Inventory

The total value of all inventory, including raw materials, work-in-process, and finished goods, at the end of an accounting period.

Weighted-Average Method

A cost accounting method that averages the costs of goods available for sale for the calculation of the cost of goods sold and ending inventory.