Question: - The aggregate demand equation is given by Y,= 1560 P, and the short-run aggregate supply equation is given by P EP, +4(Y,Y*). where

The aggregate demand equation is given by Y, = 1560 - P, and the short-run aggregate supply equation is given by P, EP, +4(Y,

- The aggregate demand equation is given by Y,= 1560 P, and the short-run aggregate supply equation is given by P EP, +4(Y,Y*). where EP, is the expected price level. The economy was in the long-run equilibrium when the central bank reduced the interest rate and conducted an open market purchase of bonds from commercial banks. The aggregate demand curve shifts consequently to the right and its new equation in period t+1 is Y+1=1600 P+1. Calculate the value of output gap (Y+1Y*) in period t+1, knowing that people have rational expectations BUT monetary expansion was unexpected. Show your 1 work!

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ANS WER The output gap in period t 1 would be Y 1 Y 1600 P 1 15 60 P 40 P EX PL AN ATION The ... View full answer

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