Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y = 2(M/P) and M = 1,500. Assume the economy is initially in long-run equilibrium, i.e. Y=3000 and P=1.0.

a.

If M increases to 2,000, what are the short-run values of P and Y? (6 points)

b.

Once the economy adjusts to long-run equilibrium at M = 2,000, what are P and Y? (6 points)

c.

Use a chart with curves of aggregate demand and aggregate supply (both short-run and long-run aggregate supply curves) to show the impact of the increase of M on P and Y. (10 points)