Consider the given classical closed economy with the 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
Q1. Determine the value of P in the long run equilibrium?
Q2. Now assume that in Year 1, pe equals to the long- run equilibrium value of p which you computed in the above part, and that the nominal money supply rises unexpectedly to M = 50000. Determine the new short-run equilibrium values of the P and Y in year 1?