Suppose that the long-run aggregate supply curve (potential output, Y is vertical at Y = $3,000 while the short-run aggregate supply curve is horizontal at P = 1.0 (and once again, P = 1.0 is the SRAS Curve, in other words). Suppose as well that the aggregate demand curve is Y = 2(M/P) and M = $1,500.
a. If the macro economy is initially in long-run equilibrium, what are the values for P and Y?
b. If M increases to $2,000, what are the new short-run values of P and Y?
c. Once the economy adjusts to long-run equilibrium at M = $2,000, what are P and Y? Also, what is the long-run percentage change in aggregate output (%ΔY)? What is the long-run percentage change in the aggregate price level (%ΔP)?