Calculating short- run equilibrium values of P also Y.
Consider the following classical closed economy with Lucas style monetary misperceptions
Aggregate demand (AD): Y= 1000- (250)/(M/P)
Short- run aggregate supply (SRAS): Y=Y * + 0.995(p-p*)
Full-employment output: Y*=900
Nominal money supply: M= 40000
A. Illustrate what is the value of P in long run equilibrium?
B. Now suppose which in Yr 1, pe equals the long- run equilibrium value of p which you Computed in part A also which the nominal money supply increases unexpectedly to M= 50000. Illustrate what are the new short- run equilibrium values of P also Y in yr 1?