thumb-up by

• answering in 1 hour
• providing steps, calculations and clear answers

Question 4 (30 marks) Suppose that we have the following behaviour equation 0 C=100+0.75(YT);I=5025i;G=50,T=50; 0 Money demand: M P = Y 1001', (Instead of M / P, Iwrite the demand curve in M P for convenient calculation) 0 Money supply: M = 1000; o P = P3 + Y 625, where P3 is the expected price a. Solve for the medium run equilibrium output (Y0) and interest rate (to) and price level (P0). b. Suppose in year 2017 , the economy is initially in the medium run equilibrium found in part (a). In year 2018, money supply changes to M = 1300. Solve for the equilibrium output and price in year 2018, and 2019, and obtain the new medium run equilibrium output and price. Draw a diagram with clear mark of the AD curve, AS curve for year 2017, 2018, 2019 and the new medium run. (Hint: the expected price level this year equals to the actual price level of last year) c. Suppose in year 2017 , the economy is initially in the medium run equilibrium found in part (a). The AS curve changes to P = P3 + Y 700 in 2018 (M = 1000). Solve for the equilibrium output and price in year 2018, and 2019, and obtain the new medium run equilibrium output and price. Draw a diagram with clear mark of the AD curve, AS curve for year 2017 , 2018, 2019 and the new medium run. (Hint: the expected price level this year equals to the actual price level of last year)