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?

• 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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