Suppose research has uncovered the following aggregate demand and supply functions for an economy:

AD:P = 90 - 0.05Y

AS:P = 40 + 0.2Y

a)Draw the AD and AS functions to illustrate the short-run equilibrium real GDP and price.

?AD

b)What are the short-run equilibrium values for real GDP and the price level from the graph above? Let us also assume that this short run equilibrium is also the long run equilibrium, that is, Y=Y_P.

Real GDP =

0

Price level =

0

c)Suppose a rise in demand for new houses increased the investment component aggregate expenditure, and increased AD at each price level by 400. Draw the new AD curve in the graph above.

d)Complete the following paragraph.

Suppose research has uncovered the following aggregate demand and supply functions for an economy: AD: P = 90 - 0.05Y AS: P = 40 + 0.2Y 3) Draw the AD and AS functions to illustrate the short-run equilibrium real GDP and price. VAD 400 800 1200 1600 2000 2400 i Real GDP I b) What are the short-run equilibrium values for real GDP and the price level from the graph above? Let us also assume that this short run equilibrium is also the long run equilibrium, that is, Y=Yp. Real GDP Price leve c) Suppose a rise in demand for new houses increased the investment component aggregate expenditure, and increased AD at each price level by 400. Draw the new AD curve in the graph above. d) Complete the following paragraph. d) Complete the following paragraph. To conclude, the rise in AD due to increased the investment component aggregate expenditure will create a/an _ gap, which will cause unemployment to _ relative to the natural rate. If the government wants to close this gap, it should _ government spending and _ taxes. If the central bank wants to close this gap, it should _ interest rates. If neither the government nor the central bank responds to the gap, input costs such as wages will eventually _ and the _ will shift to the _ to close the gap. This process, however, may take a very long time to complete