Assume that the long-run aggregate supply curve is vertical atY= 3,000 while the short-run aggregate supply curve is horizontal atP= 1.0. The aggregate demand curve isY= 2 M/P, andM= 1,500.

a.

If the economy is initially in long-run equilibrium, what are the values ofPandY?

b.

What is the velocity of money in this case?

c.

Suppose because banks start paying interest on checking accounts, the aggregate demand function shifts toY= 1.5 M / P. What are theshort-runvalues ofPandY?

d.

What is the velocity of money in this case?

e.

With the new aggregate demand function, once the economy adjusts to long-run equilibrium, what arePandY?

f.

What is the velocity now?