Please Explain

QUESTION 7 3 points Save Answer A recent stogy discusses how uncertainty can inhibit business investment. The article follows a young woman who is considering starting a new small business, encouraged by one of the political leaders of her country, but she holds back from actually buying any of the necessary equipment because she is unsure how the city government will regulate the industry. This story illustrates how policy uncertainty can reduce investment as entrepreneurs wait for more information before making financial commitments. Suppose that we build a model with the reduced form equations for consumption and investment of C = 5 _ 0757'... 0.5M- 02 SP and I = 12 + M- mU _ 1 25p where U represents the amount of uncertainty. Putting the components together the AD equation would be Y= 17 + 1.5M O.75T+ G- 1.5P mU' i. If the AS equation is Y= 2 + 0 7503 _ E[P]) then you can solve for Y and P in terms of the exogenous variables (T, M, G, E[P], m, and U). What are the equations forY and P? ii. Put your equations for Y and P into the appropriate columns in m spreadsheet. It updates E[P] using the expectations equation from class ( E[P]: = Pt _ 1) and has prefilled values for the exogenous variables. Is the economy initially in a long run equilibrium? If yes, how do you know? If not, does it have an inationary gap or recessionary gap? iii. In period 5 the uncertainty increases substantially. This causes a recession because it reduces aggregate demand. You can verify that the bigger the value of m the larger the recession. What would be a good name for m? What is its function within the model