Y = C + I + G
C + 200 + 0.63Y
I = 1000-2000R
X = 525-0.1Y-500R
M = 0.1583Y-1000R
? = 1.2[(Y-1 - 6000)/6000]
Money supply is 900, government spending is 1200, ouput is at its potential level of 6000, with a price level of 1.
a. There is a money demand shock, and the new money demand equation is given by M = 0.1583Y-2000R
In the year of the shock, compute the value of GDP, price level, interest rates, and real money supply. Hint: Derive IS and LM equations to find GDP and interest rates.
b. Calculate the new long-run equilibrium values for income, prices, interest rates, and real money supply.