4. An economy is described by these equations: Equilibrium in the goods market: where and Y = C+I+ G. C = 10+ 0.6(Y T) - T = 10 G=0 I = 805r (r is denoted in percentage terms) Equilibrium in the money market: M Y 310 = + P 3 3 The aggregate supply curve for the economy is given by (Y - Y) 200 125 2 P = P + r +v where Pe is the expected overall price level, v is a supply shock, and is the natural (long-run) level of output. Assume that Y = 200. (a) Calculate the long-run equilibrium of the economy, that is, P, Y, C, I, and r when P = 2 and v = 0. Draw a graph of the aggregate demand and aggregate supply curves and show where the long-run equilibrium is. (b) Calculate the money supply consistent with your answer above. (c) Suppose now that a supply shock due to an increase in the price of crude oil generates a recession in the economy and, as a consequence, the value of output is now 186. Calculate the values of C, I, r, P, and v consistent with this short-run equilibrium. Continue to assume that M is the value you found in (b), T = 10, G = 0, and Pe = 2.