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2. Consider the following extended classical economy (in which the misperceptions theory holds): AD SRAS Full-employment output Natural unemployment rate Y 300+10(MIP) Y=Y+P-Pe Y=500 =0.06
2. Consider the following extended classical economy (in which the misperceptions theory holds): AD SRAS Full-employment output Natural unemployment rate Y 300+10(MIP) Y=Y+P-Pe Y=500 =0.06 = a. Suppose that the money supply M= 1000 and that the expected price level pe 50. What are the short-run equilibrium values of output Y and the price level P? What are the long-run equilibrium values of these two variables? b. Now suppose that an unanticipated increase raises the nominal money supply to M = 1260. What are the new short-run equilibrium values of output Y and the price level P? What are the new long-run equilibrium values of these two variables? In gen- eral, are your results consistent with an expecta- tions-augmented Phillips curve
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