Y6

1. Assume that the long-run aggregate supply curve is vertical at Y = 9,000 units of output while the short-run aggregate supply curve is horizontal at P = $4. The aggregate demand curve is: Y =(M*V)/P , where V 6 and M = $3,000 a) Find the current short-run equilibrium values of P and Y. b) Find the expected long-run equilibrium values of P and Y. c) Now assume an unexpected adverse demand shock occurs (e.g. decrease in consumer confidence) and consequently the velocity of money decreases to 3. Compute the new short-run equilibrium level of P and Y, and assess if the long-run equilibrium will change. d) Plot your results in a single plot (parts a to c), properly labelled