Suppose that the equation for the aggregate demand is Y = $9,000 +Ms/P, where Ms is the nominal money supply and P is the price level. Initially the nominal money supply equals $3,000. In addition, suppose that the expectations of firms and workers are rational in the sense defined on P. 557
a. Calculate points on the aggregate demand curve when the price level equals 0.8, 1.0, 1.2, 1.25, and 1.5, given the initial value of the nominal money supply.
b. Suppose that natural real GDP equals $12,000 and that the short run supply curve is given in the table below, where the price surprise equals P - Pe and Pe is the expected price.
Price surprise -0.2, 0.0, 0.2, 0.25, 0.5
Real GDP 11,900 12,000 12,100 12,125 12,250