Suppose that the economy's long-run output level is produces accourding to the following production funciton: Y= AK^1/2L^1/2 (will attach picture of the function) and that A = 5, K = 400 and L = 100 A. What is the economic meaning of the powers of K and L? B. What is the level of output ? produced when the economy in long-run equilibrium. C. Suppose that aggregate demand in the economy is described by the following equation: Y^d = m/kP Where M is the money supply, P is the price level and k = 1/V (velocity of money). Explain carefully where this equation is derived from and its interpretation
Suppose that the economy's long-run output level is produces accourding to the following production funciton: Y= AK^1/2L^1/2 (will attach picture of the function)
and that A = 5, K = 400 and L = 100
A. What is the economic meaning of the powers of K and L?
B. What is the level of output ? produced when the economy in long-run equilibrium.
C. Suppose that aggregate
Y^d = m/kP
Where M is the money supply, P is the price level and k = 1/V (velocity of money). Explain carefully where this equation is derived from and its interpretation
D. Suppose that M = 2000 and that k = 2. What is the price level P at which the economy is in long-run- equilibrium? Plot such an equilibrium on a diagram with P on the vertical axis and Y on the horizontal axis, by distinguishing between the short-run and the long-run equilibrium.
E. Now suppose that starting from the equilibrium of (b) and (c), the Central Bank increases M to 3000. Calculate the value of Y in the new short-run equilibrium and of P in the new long-run equilibrium. Illustrate graphically the impact of this change on the new short-run and the new long-run equilibrium of the economy. Explain very carefully the adjustment process in the economy.
F. Suppose that A increases. Explain the reasons that might lead to an increase in A and show graphically the short and long-run impact of such a change.
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