ECONOMICS
3012
PROBLEM SET 6
J. ALLEN
SPRING 2006
AD and MAS
Given:
γ = .8
β = 5
A = 625
M = 60
Pt-1 = 1.0
i = .02 Y - .2 M/P
Yn = 800
Prices can not fall, so Pt-1 is the highest previous price level. Yr is a Atransitory@ value of Y ; a value used in
solution. The true equilibrium value of Y may or may not equal Yr . The Aggregate Supply is the MAS curve
from Notes III, A.
To solve: first set P = Pt-1 and find Yr .
i.
If Yr  Yn then Y = Yr
holding P constant .
ii.
If Yt > Yn then Y = Yn .
and P = Pt-1 .
This is just what we did with IS and LM only,
Use the AD curve to solve for Pt .
1.
Using the information above, find Y0 and i0 .
2.
Do each case below sequentially starting from the equilibrium of 1. above .
You should draw crude curves in both the P,Y space and the i,Y space for each.
a)
G increases by 62.5 . Find new AD1 , Y1 , P1 and i0 .
b)
G decreases by 25 . Find new AD2 , Y2 , P2 and i2 .
c)
M increases to 72 . Find new AD3 , Y3 , P3 and i3 .
d)
M decreases to 60 . Find new AD4 , Y4 , P4 and i4 .
How much I was crowded out?*
Round P and i to 2 decimals. Round Y and (M/P) to whole numbers.
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* Yes, I know, there is no Investment function given. But you can answer this anyway.