+ 4. An economy has the following AD and AS curves.

AD curve Y = 300+30(M/P).

AS curve Y = ¯¯¯ Y+10(P −Pe

).

Here,

¯¯¯

and Y =500 M=400

a. Suppose that

.

Pe =60 P

.

. What are the equilibrium values of the price level, , and output, ? (Hint: The solutions for Y

P in this part and in part ( ) are multiples of 10.)

b

b. An unanticipated increase raises the money supply to M=700

. Because the increase is unanticipated, Pe remains at 60. What are the equilibrium values of the price level, , and output, ?

P Y

c. The Fed announces that the money supply will be increased to M=700

, which the public believes. Now what are the equilibrium values of the price level, , the expected price level, Pe

, and output, ?

Y