Calculating equilibrium values of P also M in classical closed economy with Lucas style monetary misperceptions.

Consider the following classical closed economy with Lucas style monetary misperceptions

Aggregate demand (AD): Y= 1000- (250)/(M/P)
Short- run aggregate supply (SRAS): Y=Y * + 0.995(p-p*)
Full-employment output: Y*=900
Nominal money supply: M= 40000
P in yr 1 = 16,020.10

Suppose which the expected price level in any yr equals the actual price level in the previous yr. For instance, pe in yr 2 equals the value of P in yr 1

1.Draw a graph which describe how the following elements(a) the long run aggregate supply curve- label it LRAS; (b) the aggregate demand curve in yr1 - label it AD1 (c) th eyr1 ( which you Computed in part B - label it as point B an d(e) the SRAS curve in yr 2- label it SRAS1

2. Suppose which the central bank sets the nominal money supply in yr so which output in yr 2 equals its full employment level.

a. In the figure you drew for partc.1, draw the aggregate demand curve I yr2 which achieves this goal. Label this curve AD2.

b. Illustrate what is the value of the equilibrium price level in yr2?

c. Illustrate what value of M will lead the economy t full employment in yr2?

3 Now suppose which the central bank wants the economy in yr 4 to return to the original long- run equilibrium in part A, with same price level as in part A. Continue to Suppose which the expected price level in any yr equals the actual price level in the previous yr.

A. Illustrate what must be the value of Pe in yr 4 if y=y also p equals l the value in part A

B. Illustrate what must be the value of P I nyr 3 if P inyr 4 equals the value in part c-a

Immediately above

c. Illustrate what value of M in yr 3 will achieve the value of P in yr 3 in part c-b immediately above