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.
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* Yes, I know, there is no Investment function given. But you can answer this anyway.