An Economy Is Described by the Aggregate-Demand Curve Y=70-P and the Short-Run

question 118

Essay

An economy is described by the aggregate-demand curve Y=70-P and the short-run the aggregate-supply curve Y=10+2P.
a) If the economy is in long-run equilibrium, what are the long-run level of output, the actual, and the expected price level?
b) Suppose consumers' confidence in the economy declines so that the aggregate demand declines by 10 percent. Calculate the new short-run equilibrium. What is the rate of change in output induced by the decline in confidence? What is the inflation rate?
c) After a while, when some people observe the reduced economic activity and unemployment rises, they accept lower wages. Calculate the long-run output and price level.

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