Assume That the Long-Run Aggregate Supply Curve Is Vertical at Y

Essay

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-tun equilibrium, what are the values of $P$ and $Y$ ?
b. What is the velocity of money in this case?
c. Suppose because 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-tun equilibrium, what are $P$ and $Y$ ?
f. What is the velocity now?