# Answers PS8 - Econ 3140-2 Fall 2009 Problem Set 8 Answer...

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Econ 3140-2 Fall 2009 Problem Set 8 Answer Key 1. (a) Equating aggregate demand to short-run aggregate supply gives: 300+10 M P ± = 500+ P P , 300+(10 ± 1000 P ) = 500+ P 50 , 10000 P = 150+ P . Multiplying both sides of the equation by P and rearranging gives P 2 150 P 10 ; 000 = 0 , which can be factored as ( P 50)( P + 200) = 0 . This has the nonnegative solution P = 50 . Since P e is also 50 , the expected price level equals the actual price level, so output is at its full-employment level of 500 and the unemployment rate is at the natural rate of 6% . These are the long-run equilibrium values of the three variables as well. (b) When the nominal money supply increases unexpectedly to 1260 , we again equate aggregate demand to short-run aggregate supply, which gives: 300+10 M P ± = 500+ P P , 300+(10 ± 1260 P ) = 500+ P 50 , 12600 P = 150+ P . Multiplying both sides of the equation by P and rearranging gives P 2 150 P 12 ; 600 = 0 , which can be factored as ( P

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