Answer to Question #210756 in Macroeconomics for Samia

Question

Y=A(0.025k-0.5N)N

A=2\3

K=2000

N=-18+(18/5)w

5-c=200+(2/3)(y-T)-300r

6-T=-75+(1/4)Y

I=100-100r

G=100

L=0.5Y-200i

M=6300

π=0.10

Using this information solve the question numerically:

Beginning from the initial classical equilibrium suppose that the central bank increases the money supply by 420 while price remains fixed as it's initial long run equilibrium level. What will be the impact of this policy on all endogenous variables in short run and long run?

Answer 1

If the central bank increases the money supply by 420 while price remains fixed at it's initial long run equilibrium level, then aggregate demand will increase in the short run, and aggregate supply will increase in the long run, so the equilibrium output level will increase, and the price level will remain unchanged.