Problem
An economy is described by the aggregate-demand curve Y=100-P and the short-run the aggregate-supply curve Y=-12.5+(1/2)P.
I. If the economy is in long-run equilibrium, what are the long-run level of output and price level?
II. Suppose that a new tax on consumption is implemented, leading demand to shift by a factor of B. Which direction do you expect the AD curve to shift? Through which of the channels discussed in lecture will we see this shift?
III. Suppose B= 0.33 (in other words, AD shifts by 33%). Calculate the new short-run equilibrium.