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.
1. If the economy is in long-run equilibrium, what are the long-run level of output and price level?
2. Suppose that a new tax on consumption is implemented, leading demand to shift by a factor of. Which direction do you expect the AD curve to shift? Through which of the channels discussed in lecture will we see this shift?
3. Suppose, (in other words, AD shifts by 33%). Calculate the new short-run equilibrium.