2. Suppose the economy is characterized by the following Classical Model with Misperceptions: IS curve: Y= 7,490 - 2,500r LM curve: M/P = 0.5Y - 500(r + e) SRAS curve: Y = + 100(P - Pe) The nominal money supply is M = 88,900, expected inflation is e = 0, and full-employment output is = 5,768.

2.1 Derive the equation for the aggregate demand curve.

2.2 If the economy begins in general equilibrium, what are the equilibrium values of the price level and output?

2.3 If the expected price level, , is the price level you found in part 2.2, what happens to the price level and output in the short run if there's an unanticipated decrease in the nominal money supply to M=81,060? {Hint: Use the quadratic formula to find the solution for the price level} 2.4 Calculate the long-run equilibrium value of the price level and output after the expected price level increases.

2.5 Show the short-run and long-run effects graphically in the AD-AS model with misperceptions, labeling as many points as you can.

Answer rating: 100% (QA)

21 Deriving the AD curve Substitute the LM curve into the IS curve Y 7490 2500r MP 05Y 500r e Solve ... View the full answer