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Unformatted text preview: Econ 305–Fall 2007 Problem Set 3 Posted: October 29 Due: November 5 IN CLASS 1 Question 1 Answer the following questions using the AD & AS model developed in Chap- ter 9. (a) Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines) and no action is taken by the government, what will happen to the output and prices in the short-run and long-run? (b) Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), what could the Fed do to stabilize output? (c) In the graph below, initially the economy is at point E , with price P and output Y . Aggregate demand is given by curve AD , and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by AD 1 . The economy moves first to point (?), and then, in the long-run, to point (?)....
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