Assume that you are given the following information about an economy. The Cobb-Douglas production function is given by =

A =5, = 0.5, L = 900, K = 400, M = 1500, V = 2, and short run aggregate supply (SRAS) is given by P =1. Where A = measure of technology in the economy, = capital's share of income, K= stock of capital, L= the number of workers, M = money supply, V = velocity of money, and P=aggregate price level, and Y = output level (income).

Assume the economy is initially at the natural level of output. Use the AD-AS model to illustrate both the short-run and long-run impact of an adverse supply shock. - if the no-policy action is taken. - If the central bank decided to change the money supply

show numerical values of points (a) to (c) on your diagram

a) If the economy is initially in long-run equilibrium, what are the numerical values of the price level (P) and output (Y)?

b) Now suppose a supply shock moves the short-run aggregate supply curve to P = 1.5. What are the new short-run numerical values of P and Y?

c) If the aggregate demand curve and long-run aggregate supply curve are unchanged, what are the long-run equilibrium values of P and Y after the supply shock?

d) Suppose that after the supply shock the central bank wanted to hold output at its long-run level. What level of M would be required? If this level of M were maintained, what would be longrun equilibrium P and Y?

e) What is the advantage and disadvantage of the Automatic Adjustment Mechanism (AAM) and the Stabilization policy? Be sure to label: (i). the axes (ii). the curves, (iii). the initial equilibrium values, (iv). the direction curves shift, (v). the terminal equilibrium values.