A Pigou Effect is introduced into an economy similar to problem 3 by allowing Ap to become price dependent We now have IS Y k(Ap 200r) LM Y 5(Ms P) 500r where k 2 5, Ap 4,600 600 P, Ms 1,800, and P 1 0 As with parts a and b of problem 3, this problem aims to derive the AD curve (a) Find the equilib...

a See Problem 1 for the equation of the LM curve The equation of the IS curve is Y kAp Therefore the equation of the IS curve is Y 254600 600P 200r 11 ...

A Pigou Effect is introduced into an economy similar to problem 3 by allowing Ap to become

Question:

A Pigou Effect is introduced into an economy similar to problem 3 by allowing Aʹp to become price-dependent. We now have:
IS: Y = k(Aʹp – 200r)
LM: Y = 5(Ms/P) + 500r
where k = 2.5, Aʹp = 4,600 + 600/P, Ms = 1,800, and P = 1.0. As with parts a and b of problem 3, this problem aims to derive the AD curve.
(a) Find the equilibrium level of output and the equilibrium interest rate.
(b) What are the equilibrium real output and equilibrium interest rate when the price level equals 0.8? When it is 1.2? When it is 2.0? Plot the aggregate demand curve based on these answers.
(c) Is the AD curve flatter or steeper than the AD curve of part b of problem 3?