Please answer all the questions with steps and a detailed explanation.

This will be question that pulls in a lot of parts of this course. So, consider the following economy: Suppose that the production function for the economy is given by: Y = AL/3K1/3 Suppose that this economy has 1,000 units of Labour, and 125 units of capital, and TFP (A) is equal to 10. The Short-Run Aggregate Supply Curve (AS) here is given by: Y = 5p And when we consider the AEF at a price level of $1,400, the main components of it (C, 1, & G) are given by (we are assuming a closed economy NX = 0): C = 300 + 0.8Y I = 300 G= 200 1. What is potential GDP in this question (Y*)? Show your work. [2 points] Suppose also that for any $10 decrease in price, desired consumption will increase by $5. 2. Write down the equation for the Aggregate Demand Curve (AD) in the form of Y = a + bp. Show your work. [3 points] 3. What is the current Short-Run Equilibrium value for Real GDP (Y) and the price level (p)? Show your work. [2 points] Now suppose that the Central Bank has set the current Money Supply to be equal to $8,000. This Money Supply is currently made up of $2,000 of printed currency, and $6,000 of Bank Deposits. The current mandated reserve ratio is 10%. The Demand for Money (MD) as a function of the interest rate ("7") is given by: MD = 20,000 - 1,0001 5. Draw the MS and MD curves in a single figure. Label all x-intercepts and y-intercepts. Where is the equilibrium in the money market? Given this, what is the current prevailing market interest rate (i*)? [4 points] Now suppose that there is an increase in autonomous consumption of 180. 6. What will be the new short-run equilibrium Real GDP in this case? Are we in an inflationary gap or output gap now? How large is it? Show your work. [4 points] Finally, suppose that for every 1% decrease in the interest rate, Desired Consumption will increase by $25 and Desired Investment will increase by $25. The Central Bank wants to close this output gap. 7. If the Central Bank wants to close this gap by changing the Money Supply in circulation, how much does the MS need to change to close this gap? What is the new interest rate? Show your work. [4 points) 8. Suppose instead that the Central Bank wants to reduce the money supply by raising reserve requirements instead. How much does it need to raise the reserve requirements to close this gap? Show your work. [3 points] For the purposes of the next questions, the First MD Curve is as before: MD = 20,000 - 1,0001 And the Second MD curve a new MD curve: MD 20,000 - 4001 In the case of the Second MD curve, also assume that the Money Supply begins at 15,200. (50 we start at the same interest rate in each case). 9. With the Second MD Curve, would the Central Bank need to change the Money Supply by more or less than it would with the First MD Curve if it wanted to close this inflationary gap? Explain your answer. [2 points] 10. Which of the two curves would Keynesians believe is more likely to be the case? Which is more in line with the monetarist point of view? Explain your answer. [2 points] This will be question that pulls in a lot of parts of this course. So, consider the following economy: Suppose that the production function for the economy is given by: Y = AL/3K1/3 Suppose that this economy has 1,000 units of Labour, and 125 units of capital, and TFP (A) is equal to 10. The Short-Run Aggregate Supply Curve (AS) here is given by: Y = 5p And when we consider the AEF at a price level of $1,400, the main components of it (C, 1, & G) are given by (we are assuming a closed economy NX = 0): C = 300 + 0.8Y I = 300 G= 200 1. What is potential GDP in this question (Y*)? Show your work. [2 points] Suppose also that for any $10 decrease in price, desired consumption will increase by $5. 2. Write down the equation for the Aggregate Demand Curve (AD) in the form of Y = a + bp. Show your work. [3 points] 3. What is the current Short-Run Equilibrium value for Real GDP (Y) and the price level (p)? Show your work. [2 points] Now suppose that the Central Bank has set the current Money Supply to be equal to $8,000. This Money Supply is currently made up of $2,000 of printed currency, and $6,000 of Bank Deposits. The current mandated reserve ratio is 10%. The Demand for Money (MD) as a function of the interest rate ("7") is given by: MD = 20,000 - 1,0001 5. Draw the MS and MD curves in a single figure. Label all x-intercepts and y-intercepts. Where is the equilibrium in the money market? Given this, what is the current prevailing market interest rate (i*)? [4 points] Now suppose that there is an increase in autonomous consumption of 180. 6. What will be the new short-run equilibrium Real GDP in this case? Are we in an inflationary gap or output gap now? How large is it? Show your work. [4 points] Finally, suppose that for every 1% decrease in the interest rate, Desired Consumption will increase by $25 and Desired Investment will increase by $25. The Central Bank wants to close this output gap. 7. If the Central Bank wants to close this gap by changing the Money Supply in circulation, how much does the MS need to change to close this gap? What is the new interest rate? Show your work. [4 points) 8. Suppose instead that the Central Bank wants to reduce the money supply by raising reserve requirements instead. How much does it need to raise the reserve requirements to close this gap? Show your work. [3 points] For the purposes of the next questions, the First MD Curve is as before: MD = 20,000 - 1,0001 And the Second MD curve a new MD curve: MD 20,000 - 4001 In the case of the Second MD curve, also assume that the Money Supply begins at 15,200. (50 we start at the same interest rate in each case). 9. With the Second MD Curve, would the Central Bank need to change the Money Supply by more or less than it would with the First MD Curve if it wanted to close this inflationary gap? Explain your answer. [2 points] 10. Which of the two curves would Keynesians believe is more likely to be the case? Which is more in line with the monetarist point of view? Explain your answer. [2 points]