You are given the following equation for the aggregate demand (AD) and short-run aggregate supply (SAS) curve: AD: Y = 1.25Ap + 2.5M/P SAS: Y = 11,250 - 20W + 1,000P
Where Y is real GDP, Ap is the amount of autonomous planned spending that is independent of the interest rate, M? is the nominal money supply, P is the price level, and W is the nominal wage rate. Assume that Ap equals 5,000, M? equals 2,000, W equals 50, and natural real GDP, Y?, equals 11,250.
A. Use the values for the autonomous planned spending that is independent of the interest rate and nominal money supply to derive the equation for the aggregate demand curve. Compute the amount of aggregate demand when the price level equals 2.0, 1.25, 1.0, 0.8, and 0.5. graph the aggregate demand curve
B. Derive the equation for the sort-run aggregate supply curve, given that the nominal wage rate equals 50. Compute the amount of short-run aggregate supply when the price level equals 2.0, 1.25, 1.0, 0.8, and 0.5. graph the short-run aggregate supply curve.
C. Given your answers to parts a and b, explain what the shot-run and long-run equilibrium levels of real GDP and the price level are.
D. Given your answers to part c, explain what the equilibrium real wage rate is.
E. Suppose the autonomous planned spending increases by 800 billion so that A?p = 5,800. Explain if this increase is the result of increases willingness of financial market firms to lend to consumers and business firms or a collapse in the housing market, which reduces household wealth and housing construction. Derive the new equation for the aggregate demand curve. Compute the new amount of aggregate demand when the price level equals 2.0, 1.25, 1.0, 0.8, and 0.5. graph the new aggregate demand curve.