Assume that an economy has the given aggregate demand curve:
Y = 3401+ 2.888 M/P and a price adjustment schedule
II = 1.2[(Yt- i – Y*)/Y*]
Here, Y* is a potential real output = 6000, M = money supply = 900
Q1. Plot the aggregate demand curve and potential GDP line.
Q2. If Po = 0.5 then find out Yo? Does this place upward or downward pressure on prices? Illustrate.
Q3. find out the path of economy, that is, compute real GDP, the price level, the inflation rate and real money stock for each and every year till GDP within 1% of the potential. (Limit computed values to 10 decimals points)