Suppose that the economy is initially in long-run equilibrium with a natural rate of output of 5000, and that the aggregate demand and supply functions are given by:

AD = 8000 - 200P
AS = 4000 + 300P

(a) Calculate the short-run equilibrium output and price level assuming that there are no sticky prices.

(b) Calculate the short-run equilibrium output and price level assuming that there are sticky prices, and that the short-run aggregate supply curve can be expressed as SRAS = 4000 + 300P - 100(Pe - P), where Pe is the expected price level.

(c) Determine the output gap and inflation rate in the short-run equilibrium in part (b).

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