Question

Question 2

The yearly barley is almost ready to be harvested in Ogdenville (still funny). The AD, SRAS and LRAS curves are given as:

Y = 100/P+99

And the aggregate supply curves as:

P = 2Y-100

Y* = 100

1. [2 points] Find the output and price level for Ogdenville in the short run.

2. [4 points] If potential output is 100, is ogdenville facing a recession or exapansion? In addition, Illustrate the situation (LRAS, SRAS and AD curves with SR and LR equilibriums) TIP: use a ploting software to double check not a virus...

Assume that the Ogdenville economy faces a shock like no other! A negative demand a hits the economy. Consumers reduce consumption to only necessary goods and investors sentiment dwindles. The new AD curve can be described as:  

Y = 75 + 100/P

3. [6 points] With this new information, find the Long Run equilibrium and the Short Run equilibriums. And illustrate the new AD curve in the above diagram.

1. [20 points] (Hard) Apply adapative expectation to find the new short run supply curve. Find how many guesses firms will need to take such that long run equilibrium is achieved. (At each time period provide the expected price level, the price level and the output level.). The SRAS can also be expressed as:

   Pt=2Yt+Pet−200

Answer 1

AD2 LRAS SRAS -100 + 50- AD1

AD: Y. 100+99 SRAS : posr-100 ; :: Y: ? + 50 LRAS : T:100 cm In the short rum: AD I SRAS ... 100+995 + 50 a, 19 = p - 200 98 p-p+200 ='0 a, p2-980-200 = 0 a, p2-100P + 2 p-200=0 ac, PCP-100) +2(0-100)=0 or (P-100) (P + 2) = 0 : :: P-100 CP 7 -2) Y = 100 . from above; the short run output is Y=y=100 Then the economy is in long run equilibrium This is illustrated in the figuree as point A. New SRAS : Y = 75 + 100 .. New equilibrium: 75 + 100 = P + so • or, 25 + 200 -p?co or, 25+ 20 or, 50 p + 200 - p2 = 0 ori p2- 50P-200 =0 ...P = 53.723 } point B R : = 76.86 Jon figure . In the long run :. Y: 100 , .. P 240 } Point I on figure

d) pe = P(-1 According to adaptive expectation: Thus SRAS at any period tin: .. PE = 2 YE+ Pt -,- 200 By AO: " = 75 + 100 At equilibrium at any point t: PE = ? (154 ] * P4-1 - 200 = 150 + 200 Pt-1-200 :: PE-C PHF 50) Pt - 200 =0 PE (Pt-,-50)/(P4--50)*+ 800 using Pt-1 = price from previous period; the simulation is given below: Table- The economy reach equilibrium at taal if change in demand occurs at toi. 1. -
Table 1

time	Pt	Yt
	100
1	53.723	76.8614
2	16.12562	81.20131
3	5.127905	94.50114
4	4.085194	99.47864
5	4.00632	99.96056
6	4.000468	99.99707
7	4.000035	99.99978
8	4.000003	99.99998
9	4	100