Question

Consider the following misperceptions model of the economy. AD: Y = 600 + 10(M/P) SRAS: Y equals top enclose Y plus P minus P to the power of e Okun's Law: (Y minus top enclose Y )divided by top enclose Y equals negative 2 (u minus top enclose u ) Let top enclose Y= 750, top enclose u= 0.05, M = 600, and Pe = 40. Suppose there is an unanticipated increase in the nominal money supply to 800. What is the short-run equilibrium level of the unemployment rate?

Answer 1

Answer:

Consider the following misperceptions model of the economy. AD: Y =600 + 10(M/P) SRAS: Y=Y +P - pe Okun's Law: (Y - Ý )/Y = - 2ệu - 4) Let 7 =750, ū=0.05, M =600, and pe =40. a. b. What is the price level? (2%) Suppose there is an unanticipated increase in the nominal money supply to 800. What is the short-run equilibrium level of output, the unemployment rate, and the price level? (3%) When price expectations adjust fully, what is the price level? (3%) C.

Explanation:

A) from SRAS : Y = 750+P-40  

Y = 710+P

From AD: Y = 600+ 10*600/P

Y = 600 + 6000/P

So solving two eqn

710+P = 600+6000/P

110 + P = 6000/P

P* = 40

Y* = 150

b) now M = 800

So new AD :

Y = 600+8000/P

So, as Y = 710+P

So at eqm

710+P = 600+8000/P

110+P = 8000/P

P' = 50

Y' = 710+50 = 760

from Okun law

(760-750)/750 = -2(u - .05)

1/75 = -2u + .1

2u = .0867

u = .0433

c) when price expectations adjust,then

Y = Y_bar = 750 : potential GDP

SRAS shifts upwards

So from AD:

750=600+10*800/P

P = 800/15

= 53.33