Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y = 2 × M / P, and M = 1,500. a.
If the economy is initially in long-run equilibrium, what are the values of P and Y?
b.
What is the velocity of money in this case?
c.
Suppose because banks start paying interest on chequing accounts, the aggregate demand function shifts to Y= 1.5 × M / P. What are the short-run values of P and Y?
d.
What is the velocity of money in this case?
e.
With the new aggregate demand function, once the economy adjusts to long-run equilibrium, what are P and Y?
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