1. Suppose that aggregate demand in an economy is described by the quantity equation, i.e. MV=PY....

   

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1. Suppose that aggregate demand in an economy is described by the quantity equation, i.e. MV=PY. The velocity of the money supply is initially V = 60. We also assume that Y = 3600 and M = 1200. (a) Calculate the long-term price level and illustrate the equi- librium in a figure. (b) Suppose now that stricter restrictions are placed on the payment system- so that the velocity is halved to V = 30. Calculate the short-run output and illustrate the short-run equilibrium in the figure. (c) Describe the adaptation to the new long-term equilibrium in the figure. What is the new long-run price level? (d) Explain how the effect of the decrease of V can be accom- modated with economic policy. 1. Suppose that aggregate demand in an economy is described by the quantity equation, i.e. MV=PY. The velocity of the money supply is initially V = 60. We also assume that Y = 3600 and M = 1200. (a) Calculate the long-term price level and illustrate the equi- librium in a figure. (b) Suppose now that stricter restrictions are placed on the payment system- so that the velocity is halved to V = 30. Calculate the short-run output and illustrate the short-run equilibrium in the figure. (c) Describe the adaptation to the new long-term equilibrium in the figure. What is the new long-run price level? (d) Explain how the effect of the decrease of V can be accom- modated with economic policy.