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Suppose that we have the following behavior equation 1) C=0.5(Y-T)+10; I=0.25Y-50i; G=10 , T=0 ; 2) Money demand:
1. Suppose that we have the following behavior equation
1) C=0.5(Y-T)+10; I=0.25Y-50i; G=10 , T=0 ;
2) Money demand: M-p = y-200i, (Instead of M/P, I write the demand curve in m-p to make calculation simple)
3) Money supply: M=40 ;
4) P=Pe +Y-40, where Pe is the expected price
a. Solve for the medium run equilibrium Output and Interest rate and Price Level
b. Suppose in year 2012, the economy is initially in the medium run equilibrium found in part a. In year 2013, money supply changes to M=70. Solve for the equilibrium output and price in year 2013, and 2014. And obtain the new medium run equilibrium output and price. Draw a diagram with clear mark of the aggregate demand curve, aggregate supply curve for year 2012, 2013, 2014 and the new medium run.
c. Suppose in year 2012, the economy is initially in the medium run equilibrium found in part a. The aggregate supply curve changes to P=Pe+Y-55 in 2013 (M=40). Solve for the equilibrium output and price in year 2013, and 2014. And obtain the new medium run equilibrium output and price. Draw a diagram with clear mark of the aggregate demand curve, aggregate supply curve for year 2012, 2013, 2014 and the new medium run.
