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. If the economy is initially in long run equilibrium, what are the values of P and Y?

Y = 3000

  Y = 2(M/P)

3000 = 2(1500/P)

P = 1

b.What is the velocity of Money in this case?

   MV = PY

   1500*V = 1*3000

   V = 2

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?

P = 1

   Y = MV/P = 1500*1.5/1 = 2,250

d.What is the velocity of money in this case?

V = 1.5

e.With the new aggregate demand function, once the economy adjusts to long run equilibrium. What are P and Y?

Y = 3000

P = MV/Y = 2,250/3,000 = 0.75

f.What is The Velocity Now?

   V = 1.5

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