HW #9 - Countercyclical Policy Counter-Cyclical Policy in the Face of the Crisis Suppose that the long-run aggregate supply curve is given by: YZ = 'A+ -K Initially, A = 2, K = 2 Suppose that the money supply is growing at a rate of 5% per year. Suppose that the velocity of money is given by: 1 = 3C + 21 + 3G + NX Initially, C = 1 = G = NX = 0 1. Derive the aggregate demand curve and the long-run aggregate supply curve. (3 pts) 2. Solve for the initial equilibrium a) What is real GDP growth? What is the rate of inflation? (2 pts) b) What is the short-run aggregate supply curve? (2 pts) Draw an aggregate supply/demand diagram. Make sure to label your axes, the curves, equilibrium inflation and GDP growth, and vertical intercepts. (4 pts)