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

question 61

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. If $M$ increases to 2,000 , what are the new short-run values of $P$ and $Y$ ?
c. Once the economy adjusts to long-tun equilibrium at $M = 2,000$ , what are $P$ and $Y$ ?

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Definitions:

Liabilities

Financial obligations or debts owed by an individual, company, or entity to other parties.

United States Treasury Securities

Debt securities issued by the U.S. government to fund its budget deficits and manage the national debt.

Open Market

A venue where buyers and sellers engage in the trade of commodities, securities, and other financial instruments under defined regulations.

Reserve Ratio

The fraction of deposits that banks are required to keep on hand as reserves, determined by central banking authorities.