In a closed economy....

C =500 + 0.75(Y-T) (2)

I = 375 - 25r (3)

T = 500 (4)G = 500 (5)

Ms=Md (6)

Ms =1000 (7)

Md/P = L(r,Y) = 0.5Y - 50r

Calculate the long-run equilibrium values of r and P, assuming that the potentiallevel of output (Y*) is equal to 3500 monetary units. Use the IS/LM and AD/ASmodels to illustrate graphically the short-run and long-run equilibrium, and to explainhow the economy moves from the short-run to the long-run equilibrium, if the two aredifferent.

Suppose that the supply of money remains unchanged and that, in the short-run,the aggregate price level is fixed at 1.0. Suppose that the public wants to hold moremoney balances such that the money demand function changes to Md/P = Y-50r.Using the IS/LM and AD/AS models, explain what happens to equilibrium output and the equilibrium interest rate in the short-run, and equilibrium output and theequilibrium price level in the long-run.