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ECONOMICS 3012 PROBLEM SET 8 J. ALLEN SPRING 2008 AD and MAS Given: γ = .8 A = 625 P0 = 1.0 β = 5 Yn = 800 M = 60 i = .02 Y - .2 M/P Prices can not fall, so Pt-1 is the highest previous price level. Yr is a “transitory” value of Y, a value used in solution. The true equilibrium value of Y may or may not equal Yr . Aggregate Supply is the MAS curve from Notes III, A. To solve: first set P = Pt-1 and find Yr from the AD curve. i. ii. If Yr ≤ Yn then Y = Yr and P = Pt-1 . This is just what we did with IS and LM only, holding P constant. If Yr > Yn then Y = Yn . Use the AD curve to solve for Pt . 1. Using the information above, find the AD curve, 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) b) c) d) G increases by crowded out?* G decreases by M increases to M decreases to 62.5 . Find new AD1 , Y1 , P1 and i0 . How much I was 25 . Find new AD2 , Y2 , P2 and i2 . 72 . Find new AD3 , Y3 , P3 and i3 . 60 . Find new AD4 , Y4 , P4 and i4 . Round P and i to 2 decimals. Round Y and (M/P) to whole numbers. _________________________ * Yes, I know, there is no Investment function given. But you can answer this anyway.