Question

Need the answer from question 5 to 9, do not put the answer from 1 to 4, please.

Question1 Consider the following economy of Hicksonia. 1. The consumption function is given by C 200 + 0.75(Y-T). The investment function is 1 = 200-2500. Government purchases and taxes are both 100. Derive the IS curve 2. The money demand function in Hicksonia is (Md/P)-Y-10000 The money supply (M) is 1,000. Derive the LM curve under an arbitrary value of P (Hint: The intercept of the LM curve will be a function of P.) 3. Derive the AD curve. (Hint: From the IS and LM curves, you can derive the negative relationship between Y and P by eliminating r. Note that r should not appear in the AD curve.) 4. Suppose the money supply increases to 2,000. Derive the new LM curve and the new AD curve. (Hint: Repeat what you did for 2 and 3 with the new value of money supply.) How does this expansionary monetary policy affect the AD curve? 5. Suppose that the natural level of output (Y) is 1,350. How does the long-run AS curve ook like? 6. What are the long-run equilibrium values of output and price level when the money supply is 1,000? What are they when the money supply is 2,000? How does the expansionary monetary policy affecet the output and the price level in the long-run? 7. Consider the sticky price model. Suppose firms with flexible prices set the price following: while the firms with sticky prices follow: where a-1, E(Y-Ỹ) 0, Ỹ-1, 350 and EF-1. Suppose further that the share of firms with sticky prices, s, is 0.2. Derive the short-run AS curve. 8. Suppose that the share of firms with sticky prices, s, is 0.5 instead of 0.2. Derive the new short-run AS curve. How does s affect the slope of the short-run AS curve? 9. Again, consider the shift in the AD curve caused by the increase in the money supply (M) How does s affect the effect of the expansionary monetary policy on output in the short run?

Answer 1

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