A closed economy has the following AD and AS curves:
AD curve Y = 300 + 30(M/P)
AS curve Y = Y + 10(P + Pe )
Here, Y̅ = 500 and M = 400.
a. Suppose that Pe = 60. What are the equilibrium values of the price level P and output Y? (The solutions for P in this part and in part (b) are multiples of 10.)
b. An unanticipated increase raises the money supply to M = 700. Because the increase is unanticipated, Pe remains at 60. What are the equilibrium values of the price level P and output Y?
c. The Bank of Canada announces that the money supply will be increased to M = 700, which the public believes. Now what are the equilibrium values of the price level P, the expected price level Pe, and output Y?
