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Cyclical unemployment and unanticipated inflation

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Reference no: EM131692438

An economy has the following AD and AS curves.

AD: Y = 300 + 30(M/P),

AS: Y = 500 + 10(P - Pe ).

Y is real output, P is the general price level, and Pe is the expected price level. Suppose money supply, M = 400.

a. If Pe = 60, what are the general equilibrium values of the price level and real output?

b. If there is a rise in the unanticipated money supply that raises M to M=700, what are the short-run equilibrium values of the price level and real output?

c. If the rise in money supply to M=700 is anticipated, what are the equilibrium values of the expected price level (Pe ), the price level and real output? What are the corresponding rates of cyclical unemployment and unanticipated inflation? Does the relationship between cyclical unemployment rate and unanticipated inflation rate suggested by the expectations-augmented Philip curve hold at this equilibrium point? Is money neutral in this case and why?

Reference no: EM131692438

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