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

question 42

Essay

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 = 3(M/P) and M = 1,000.
a. If the economy is initially in long-run equilibrium, what are the values of P and Y?
b. Now suppose a supply shock moves the short-run aggregate supply curve to P = 1.5. What are the new short-run P and Y?
c. If the aggregate demand curve and long-run aggregate supply curve are unchanged, what are the long-run equilibrium P and Y after the supply shock?
d. 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?

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Definitions:

Rationing

A system of controlling the distribution of resources, goods, or services by limiting access to ensure equitable distribution, often implemented during shortages.

Reselling

The act of selling a product or service again, possibly after acquiring, refurbishing, or repackaging it.

Perfect Price Discrimination

A situation where a seller charges the maximum possible price for each unit consumed that each consumer is willing to pay, thus capturing the entire consumer surplus.

Consumer Surplus

The difference between the total amount that consumers are willing and able to pay for a good or service and the total amount that they actually do pay.