Suppose the economy is initially in a long-run equilibrium with an output level of 100 and a
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Suppose the economy is initially in a long-run equilibrium with an output level of 100 and a price level of 2. The velocity of money is 2, the money supply is 200, and the real interest rate is 5%. The government increases its spending by 100, while the central bank simultaneously decreases the money supply by 50. Use the Quantity Theory of Money and the IS-LM model to determine the short-run and long-run effects on output and the price level. Assume that the short-run aggregate supply curve is upward-sloping and that the long-run aggregate supply curve is vertical.
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