Assume that the long run aggregate supply is vertical at Y=3,000 while the short

Question

Assume that the long run aggregate supply 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 checking accounts, the aggregate dem 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?

Explanation / Answer

a)

P = 1.0; Y = 3,000

b.

c.

d.

e.

f.

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