Finding out the values of price level, real output and the velocity of money in the AD-AS model.
Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0.
The aggregate demand curve is Y = 2(M/P) and M = 1,500.
a. If the economy is initially in long-run equilibrium, what are the values of P and Y?
b. Illustrate what is the velocity of money in this case?
c. Suppose banks start paying interest on checking accounts, the aggregate demand function shifts to Y = (1.5)(M/P). What are the short-run values of P and Y?
d. What is the velocity of money in this case?
e. With the new aggregate demand function, once the economy adjusts to long-run equilibrium, what are P and Y?
f. What is the velocity now?