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Consider the given classical closed economy with the 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

Q1. Determine the value of P in the long run equilibrium?

Q2. Now assume that in Year 1, pe equals to the long- run equilibrium value of p which you computed in the above part, and that the nominal money supply rises unexpectedly to M = 50000. Determine the new short-run equilibrium values of the P and Y in year 1?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M910211

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