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2. Consider an economy described by the following equations: G = 1000, T = 1000, C250 +0.75(Y - T), I = 1,000-50r, P =

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2. Consider an economy described by the following equations: G = 1000, T = 1000, C250 +0.75(Y - T), I = 1,000-50r, P = 1, M = 5000, = 0.1Y-100r, Actual output is given by SRAS: Y = Y +50(P-EP) where is full employment output equal to 7000; and EP is expected price. (a) Use the ISLM model to determine the short-un equilibrium output and real interest rate (10 points) (b) What is the value of expected price (8 points)? (c) Derive the AD equation (5 points) (d) Find the short-run equilibrium price and real GDP using the AD-AS model (e) The movement from Short-run to Long-run equilibrium occurs through changes in the expected energy price which shifts SR aggregate supply curve. i. Use the AD-AS model to compute the LR equilibrium price (or in other words, the new EP ). ii. Use the IS-LM model to determine LR equilibrium real interest rate

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