# Suppose that we have the following behavior equation 1) C=0.5(Y-T)+10; I=0.25Y-50i; G=10, T=0; 2) Money demand:

8. Suppose that we have the following behavior equation

1) C=0.5(Y-T)+10; I=0.25Y-50i; G=10, T=0;

2) Money demand: m-p=y-200i, (Instead of m/p, I write the demand curve in m-p to make calculation simple)

3) Money supply: m=40;

4) P=Pe+Y-40, where Pe is the expected price

a. Solve the the medium run equilibrium

b. Suppose in year 2014, the economy is initially in the medium run equilibrium found in part a. In year 2015, money supply changes to Ms=70. Solve for the equilibrium output and price in year 2015, and 2016. And obtain the new medium run equilibrium output and price. Draw a diagram with clear mark of the aggregate demand curve, aggregate supply curve for year 2014, 2015, 2016 and the new medium run.

c. Suppose in year 2014, the economy is initially in the medium run equilibrium found in part a. The aggregate supply curve changes to P=Pe+Y- in  (m=40 ). Solve for the equilibrium output and price in year , and . And obtain the new medium run equilibrium output and price. . Draw a diagram with clear mark of the aggregate demand curve, aggregate supply curve for year 2014, 2015, 2016 and the new medium run.