Suppose that the economy's long-run output level is produced according to the following production function: and that A = 5, K= 400 and L = 100. Y = AK¹/2 L¹/2 b) What is the level of output Y produced when the economy in long-run equilibrium. c) Suppose that aggregate demand in the economy is described by the following equation: M yd = kP Where M is the money supply, P is the price level and k = 1/V (velocity of money). Explain carefully where this equation is derived from and its interpretation.

Suppose that the economy's long-run output level is produced according to the following production function: and that A = 5, K= 400 and L = 100. Y = AK¹/2 L¹/2 b) What is the level of output Y produced when the economy in long-run equilibrium. c) Suppose that aggregate demand in the economy is described by the following equation: M yd = kP Where M is the money supply, P is the price level and k = 1/V (velocity of money). Explain carefully where this equation is derived from and its interpretation.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Suppose that the economy's long-run output level is produced according to the following production
function:
and that A = 5, K= 400 and L = 100.
Y = AK¹/2 L¹/2
b) What is the level of output Y produced when the economy in long-run equilibrium.
c) Suppose that aggregate demand in the economy is described by the following equation:
M
kP
ya
=
Where M is the money supply, P is the price level and k = 1/V (velocity of money). Explain carefully where this
equation is derived from and its interpretation.
e) Now suppose that starting from the equilibrium of (b) and (c), the Central Bank increases M to 3000. Calculate
the value of Y in the new short-run equilibrium and of P in new long-run equilibrium. Illustrate graphically
the impact of this change on the new short-run and the new long-run equilibrium of the economy. Explain
very carefully the adjustment process in the economy.

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