Problem 1: Closing Output Gaps [15 Points] Suppose that the production function for the economy is given by: Y = 141131;; {(3:54 Suppose that this economy has 255 units of Labour, and 31 units of capital, and TFP (A) is equal to 100. The Short-Run Aggregate Supply Curve (AS) is given by: Y = 20p And the Short-Run Aggregate Demand lCurve (AD) is given by: Y = 25,000 20p 1. What is potential GDP in this question {W}? Show your work. [2 points] 2. What is the current Short-Run Equilibrium value for Real GDP (Y) and the price level {p}? Show your work. Are we currently in an Inflationary Gap, Recessionary Gap, or in Long- Run Equilibrium? How do you know? [3 points] Suppose that the Central Bank and the Government does not want to intervene, and so there are no scal policy or monetary policy actions taken to close this output gap. The output gap closes naturally with no intervention. 3. What would be the new price level in long-run equilibrium after the economy has closed this output gap? What would be the percent change in the price level as we move from the current {short-run) price level to this new price (long-run] level? [3 points] Suppose instead that the Central Bank takes action and uses monetary policy to completely close this output gap in the short-run. 4. What would be the new price level in long-run equilibrium after the Central Bank has closed this output gap? What would be the percent change in the price level as we move from the current (short-run) price level to this new price (long-run) level? [3 points]Finally, suppose instead that the Central Bank wanted to take action to keep the price-level completely stable. This would entail keeping it constant at its current rate. Suppose also that the Central Bank targets the interest rate directly. Suppose also that: 'I The Marginal Propensity to Spend is 0.?5. 0 Every 1% increase in the interest rate leads to a decrease in Autonomous Consumption of 25C- and a decrease in Autonomous Investment of 250. 5. How much would the Central Bank need to change the current interest rate in order to keep the price level from changing through the medium-term as this output gap closes in the economy? [4 points]