1. a. Let the money supply be 500 and the velocity be 3. Write a function representing the aggregate demand curve (assuming that velocity is independent of the price level).

b. If the long-run equilibrium level of output is 100, what will the equilibrium price level be?

c. On a graph, show what will happen in the short run to the price level and output if velocity falls to 2. (You do not need to find numbers for this one.)

d. Show what will happen in the long run if velocity remains low and nothing else happens. Show ALL curves that move and give a number for the new price level.

e. If the central bank wants to avoid this what could they do? (I DO want a number for this one.)

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Aggregate Demand Curve and Effects of Changes in Velocity a Aggregate Demand Curve Function Since ve... View the full answer