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

AD curve ( ) = + Y MP 400 25 .

AS curve ( ) = + − Y Y P P 15 . f e Here, = Y 500 f and = M 160.

a. Suppose that = P 40. e What are the equilibrium values of the price level, P, and output, Y? (Hint:

The solutions for P in this part and in part

(b) are multiples of 5.)

b. Money supply (M) increases unexpectedly to 500.

Since the increase is unanticipated, Pe remains at 40. What are the equilibrium values of the price level, P, and output, Y?

c. The Fed announces that the money supply will be increased to = M 500, which the public believes.

Now what are the equilibrium values of the price level, P, the expected price level, Pe, and output, Y?