Question

Assume that the real long-run output of RenduJ Island is 3,000, while current price level is at P = 1.0. Suppose that the aggregate demand curve is given by Y = 3(M/P) and M = 1,000.

1. Show that the RenduJ economy is (or is not) at its long-run equilibrium.
2. Now suppose a supply shock moves the short-run aggregate price level to P = 1.5. What are the new short-run P and Y?
3. If the aggregate demand curve and long-run aggregate supply curve are unchanged, what are the long-run equilibrium P and Y after the supply shock?
4. Suppose that after the supply shock the Fed wanted to hold output at its long-run level. What level of M would be required? If this level of M were maintained, what would be long-run equilibrium P and Y?

Answer 1

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