Suppose an economy is in long-run equilibrium.a. Use the model of aggregate demand andaggregate supply to illustrate the initialequilibrium (call it point A). Be sure to includeboth short-run aggregate supply and long-runaggregate supply.b. The central bank raises the money supply by5 percent. Use your diagram to show whathappens to output and the price level as theeconomy moves from the initial equilibrium to thenew short-run equilibrium (call it point B).c. Now show the new long-run equilibrium (call itpoint C). What causes the economy to move frompoint B to point C?d. According to the sticky-wage theory of aggregatesupply, how do nominal wages at point Acompare with nominal wages at point B? How donominal wages at point A compare with nominalwages at point C?e. According to the sticky-wage theory of aggregatesupply, how do real wages at point A comparewith real wages at point B? How do real wages atpoint A compare with real wages at point C?f. Judging by the impact of the money supply onnominal and real wages, is this analysis consistentwith the proposition that money has real effects inthe short run but is neutral in the long run?
Suppose an economy is in long-run equilibrium.
a. Use the model of aggregate
equilibrium (call it point A). Be sure to include
both short-run aggregate supply and long-run
aggregate supply.
b. The central bank raises the money supply by
5 percent. Use your diagram to show what
happens to output and the price level as the
economy moves from the initial equilibrium to the
new short-run equilibrium (call it point B).
c. Now show the new long-run equilibrium (call it
point C). What causes the economy to move from
point B to point C?
d. According to the sticky-wage theory of aggregate
supply, how do nominal wages at point A
compare with nominal wages at point B? How do
nominal wages at point A compare with nominal
wages at point C?
e. According to the sticky-wage theory of aggregate
supply, how do real wages at point A compare
with real wages at point B? How do real wages at
point A compare with real wages at point C?
f. Judging by the impact of the money supply on
nominal and real wages, is this analysis consistent
with the proposition that money has real effects in
the short run but is neutral in the long run?
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