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Model of aggregate demand and aggregate supply

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Suppose economy is in long run equilibrium. [Only one diagram is required for this question, draw and label clearly to show all relevant points and moves]

a. Use the model of aggregate demand and aggregate supply to illustrate the initial equilibrium (call it point A). Be sure to include both-short run and long-run aggregate supply.

b. The central bank raises the money supply by 10%. Use the diagram you drew in part a) to show what happens to output and price level as the economy moves from initial equilibrium A to the new short-run equilibrium (call it point B).

c. Show how economy moves from the short run equilibrium (point B) to the new long-run equilibrium (call it C) and explain why it moves to C.

d. According to sticky wage theory of aggregate supply, how do nominal wages at point A, compare to nominal wages at point B? How do nominal wages at point A compare to nominal wages at point C?

e. According to sticky wage theory of aggregate supply, how do real wages at point A compare to real wages at point B? How do real wages compare to real wages at point C?

f. Judging by the impact of the money supply on nominal and real wages, is this analysis consistent with the proposition that money has real effects in the short run but is neutral in the long run?

Reference no: EM132586721

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