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

question 19

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 equilibriumPandYafter the supply shock?
d.Suppose that after the supply shock the Bank of Canada 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:

Inductive Reasoning

A reasoning method where several assumptions, considered true or mostly true, are fused together to derive a particular outcome.

Deductive Reasoning

A logical process in which a conclusion follows necessarily from the stated premises; it is inference where true premises develop a true conclusion.

Skeptical

Being skeptical involves doubting or questioning the validity or authenticity of something.

Well-defined

Clearly described or outlined, with no ambiguity or confusion about the nature or limits of something.