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

question 6

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-tun 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-tun level. What level of $M$ would be required? If this level of $M$ were maintained, what would be long-tun equilibrium $P$ and $Y$ ?

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Definitions:

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