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

question 88

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 = 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 chequing 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:

Current Account

A component of a country's balance of payments that includes the trade balance, net primary income, and net secondary income, reflecting the difference between a country's savings and its investment.

Capital and Financial Account

A component of a country's balance of payments that records investment flows and purchasing of domestic firms by foreign investors, and vice versa.

International Transfers

Financial transactions where funds are sent across national borders, either by governments, businesses, or individuals.

Balance of Payments

A record of all economic transactions between the residents of a country and the rest of the world in a particular period.