Given the goods market and money market equations, determine the IS and LM, aggregate demand equations, draw the LRAS function and indicate the long run-short run equilibrium.
Suppose the economy of described by the following set of equations:
G = 1000 (M / P)^d = Y - 90 r
T = 1000 and Ms = 10,000
C = 500 + 0.80(Y - T ) P = 2
I = 1500 - 40 r
1.Determine the IS and LM equations.
2. Describe the Aggregate Demand equation
3.Assume that the short run supply function is given by P = 2, determine the equilibrium level of output. Represent this situation in a diagram.
4. Assume the output level described in part c is the corresponding long run equilibrium level of output.
5.Draw the LRAS function in the diagram above and indicate the long run-short run equilibrium.