3. Suppose the economy is characterized by the following equations. IS curve: r = 22 -0.002Y...

 

Transcribed Image Text:

3. Suppose the economy is characterized by the following equations. IS curve: r = 22 -0.002Y LM curve: M/P = Y - 250(r + ле) SRAS curve: Y =10,000 + 100(P- Pe) The nominal money supply is M = 19,000, expected inflation is лe = 0.20. (a) What is the equation of the aggregate demand curve? (b) If the economy begins in full-employment general equilibrium, what are the equilibrium values of the price level, output, and the real interest rate? (c) Suppose that the expected price level, Pe, is 4. Calculate the short-run equilibrium values of P and output, Y. 4. (a) Draw a figure, using the Keynesian IS-LM framework, of an economy operating above the full-employment level and facing demand-pill inflation. (b) If the Fed's goal is to move output to its full-employment level, what should it do with monetary policy? What will happen to the real interest rate? What is the effect on the price level? Show the result in your diagram. (c) Suppose the Fed decides to keep the money supply unchanged. How could the government use fiscal policy to move the economy to full employment? Show the result in your diagram. (d) How does the real interest rate differ between parts (b) and (c)? 3. Suppose the economy is characterized by the following equations. IS curve: r = 22 -0.002Y LM curve: M/P = Y - 250(r + ле) SRAS curve: Y =10,000 + 100(P- Pe) The nominal money supply is M = 19,000, expected inflation is лe = 0.20. (a) What is the equation of the aggregate demand curve? (b) If the economy begins in full-employment general equilibrium, what are the equilibrium values of the price level, output, and the real interest rate? (c) Suppose that the expected price level, Pe, is 4. Calculate the short-run equilibrium values of P and output, Y. 4. (a) Draw a figure, using the Keynesian IS-LM framework, of an economy operating above the full-employment level and facing demand-pill inflation. (b) If the Fed's goal is to move output to its full-employment level, what should it do with monetary policy? What will happen to the real interest rate? What is the effect on the price level? Show the result in your diagram. (c) Suppose the Fed decides to keep the money supply unchanged. How could the government use fiscal policy to move the economy to full employment? Show the result in your diagram. (d) How does the real interest rate differ between parts (b) and (c)?

Answer rating: 100% (QA)

3 a Aggregate demand curve is MP Y 250r e Substitute r 22 0002Y from the IS curve This gives M... View the full answer