An cconomy is dcscribcd by these equations: Equilibrium in the goods market: Y =

Question

An cconomy is dcscribcd by these equations: Equilibrium in the goods market: Y = C + I + G. where C = 10 + 0.6Y G = 59.5 and I = 80 -6r So the IS curve is given by 0.4Y = 149.5 - 6r Equilibrium in the money market is given by M/p = y/3 + 170 - 8r The implied aggregate demand curve of the cconomy is given by M/P = 5.2/6 Y - 88/3 The aggregate supply curve for the cconomy is given by Y = Y + 200 (P-P) where Pr is the expected overall price level and Y is the natural (long-run) level of output. Assume that Y = 200. (a) Calculate the long-run equilibrium of the economy (i.e.. P and Y) when P1 = 1.25. Illustrate your answer with a graph. (b) How much is the money supply when the economy is at the long-run equilibrium that you found in (a)? (c) Continue to assume that P = 1.25. Suppose now that the monetary authorities would like to engineer a recession where Y = 140 by unexpectedly changing the money supply. How much will the money supply have to change? How will this policy affect interest rates, investment, and consumption? Illustrate your answer with graphs of the IS-LM and AS-AD curves.

Explanation / Answer

Y = 200+200 (P-1.25)

Y = 200+200P-250

Y = -50+200P

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