Take-home problem 3: Due 10/19 Use the following information to answer parts a-i. We will discuss this in class on 10/15 The original numbers from problem 2 were used to compute an IS curve with an AP=7061.2 and multiplier of 2.04. Using that Ap level from the IS curve of problem 2 we construct an AD curve of Y=2.04Ap+2.0(MS/P). Just as in the case of the AD curve plotted in the two dimensional graph with P and Y, the interest rate is no longer shown and the real Ms/P is used instead of the nominal Ms. The SAS curve is given to you above. It is a function of W and P. The natural level of real output is given to you as 18410.2. a. Compute the AD curve using the information above. Use a price range of 0.25, 0.8, 1, and 2 to compute AD at the different price levels b. Given W equals 50 compute the SAS curve using the same price range of 0.25, 0.8, 1, and 2. c. Given your AD and SAS curve from a&b what is the equilibrium level of P and Y? Is it a short-run equilibrium, long-run equilibrium or both? d. What is the equilibrium level of the real wage, given your answer for c. Show this graphic ally. e. Given a change in Ap from 7061.2 to 7461.2, derive the new AD curve with the information above. Assume the Ap increase is due to a change consumption and investment spending. Drive the new AD equation using the price range given above. f. Derive the new short-run equilibrium points for P and Y given the Ap change in part e. (Hint set the equations equal and solve the values) g. Explain the condition of this new equilibrium P and Y is relative to YN=18410 h. What could the Federal Reserve Bank do to keep YN and P from increasing from their original points prior to the change in AD to 7461.2 i. What could Congress do to keep the price and real GDP at the original equilibrium point prior to the AD shift.

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iscuss this in class on 10/1

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. Just as in the case of the AD curve plotted in the two dimensional graph with P and Y, the interest rate is no longer shown and the real Ms/P is used instead of the nominal Ms.

The

SAS

curve is given to you above. It is a function of W and P. The natural level of real output is given to you as

18410

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1.

C

ompute the AD curve using the information above. Use a price range of 0.25, 0.8, 1, and 2 to compute AD at the different price levels

1.

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iven W equals

50

compute the SAS curve using the same price range of 0.25, 0.8, 1, and 2.

1. Given your AD and SAS curve from a&b what is the equilibrium level of P and Y? Is it a short-run equilibrium, long-run equilibrium or both?

1. What is the equilibrium level of the real wage, given your answer for c. Show this graphic ally.

1. Given a change in Ap from 7061.2 to 7461.2, derive the new AD curve with the information above. Assume the Ap increase is due to a change consumption and investment spending. Drive the new AD equation using the price range given above.

1. Derive the new short-run equilibrium points for P and Y given the Ap change in part e. (Hint set the equations equal and solve the values)

1. Explain the condition of this new equilibrium P and Y is relative to Y

N

=18410

1. What could the Federal Reserve Bank do to keep YN and P from increasing from their original points prior to the change in AD to 7461.2

1. What could Congress do to keep the price and real GDP at the original equilibrium point prior to the AD shift.

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