Question: Question: Improved AD-AS model Given that IS is Y = 2500-50i, and the interest rate reaction function is i p = 2 + 0.5(P-P *

Question: Improved AD-AS model

Given that IS is Y = 2500-50i, and the interest rate reaction function is i^p = 2 + 0.5(P-P^*), where i^p is the central bank policy rate. Assume that i (interest rate) is 0.5 + i^p(interest rate is a wedge over the policy rate). Determine the AD function. If AS function was Y = 0.25(P-P^*) + 2000 determine Y^* and P^*and inflation rate. Assume P^*= 105.

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