Problem 3Suppose people have rational expectations and the AD and AScurves take the following forms:AD: Y₁ = y 400+ 0.5.200Pt1AS: P₁ = EP₁ + — / (Y/₁ - Y)50Full employment level of output is equal to 550 and 1. In periodt=0 the actual price level Po = 1 and it was NOT equal to theexpected price level.a) Is the economy in the long-run equilibrium? Calculate (i) thelevel of output and (ii) the expected price level. Graph the AD andAS curves.b) Calculate a rise in government spending necessary to increaseincome to full employment level in period t=0. Show the impact ofgovernment policy on the AD-AS diagram.

Aggregate demand : AD : Aggregate Supply : AS : Full Employment Level = 550 , P0 = 1 Graphs are…

Suppose people have rational expectations and the AD and AS curves take the following forms: AD: Y₁ =y 400+ 0.5. 1 200 Pt Full employment level of output is equal to 550 and 1. In period t=0 the actual price level Po = 1 and it was NOT equal to the AS: P₁ = EP₁ + ²/(Yt-ỸÝ) 50

Suppose people have rational expectations and the AD and AS curves take the following forms: AD: Y₁ =y 400+ 0.5. 1 200 Pt Full employment level of output is equal to 550 and 1. In period t=0 the actual price level Po = 1 and it was NOT equal to the AS: P₁ = EP₁ + ²/(Yt-ỸÝ) 50

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Chapter1: Making Economics Decisions

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Question

Problem 3
Suppose people have rational expectations and the AD and AS
curves take the following forms:
AD: Y₁ = y 400+ 0.5.
200
Pt
1
AS: P₁ = EP₁ + — / (Y/₁ - Y)
50
Full employment level of output is equal to 550 and 1. In period
t=0 the actual price level Po = 1 and it was NOT equal to the
expected price level.
a) Is the economy in the long-run equilibrium? Calculate (i) the
level of output and (ii) the expected price level. Graph the AD and
AS curves.
b) Calculate a rise in government spending necessary to increase
income to full employment level in period t=0. Show the impact of
government policy on the AD-AS diagram.

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