# E the increase in planned spending is caused by an

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e.The increase in planned spending is caused by an increased willingness of financial market firms tolend to households and businesses, which results in a rise in autonomous consumption and planned investment expenditures at every level of income and interest rate, that is, autonomous planned spending rises.The new equation for aggregate demand is Y= 1.25(5,800) + 2.5(2,000/P) = 7,250 + 5,000/P. Aggregate demand now equals 7,250 + 5,000/2 = 9,750 when the price level equals 2. Aggregate demand now equals 7,250 + 5,000/1.25 = 11,250 when the price level equals 1.25. Aggregate demand now equals 7,250 + 5,000/1 = 12,250 when the price level equals 1. Aggregate demand now equals 7,250 + 5,000/.8 = 13,500 when the price level equals .8, and it now equals 7,250 + 5,000/.5 = 17,250 when the price level equals .5. The points on the new aggregate demand curve are: (17,250, 0.5); (13,500, 0.8); (12,250, 1.0); (11,250, 1.25); and (9,750, 2.0).f.The new short-run equilibrium values of real GDP and the price level are where aggregate demand and short-run aggregate supply are equal, which is the point of intersection of the new aggregate demand curve and the short-run aggregate supply curve. The point of intersection occurs at real GDP approximately equal to 11,450 and the price level approximately equal to 1.2. If you set the new equation of the aggregate demand curve equal to the equation of the short-run aggregate supply curve and solved for the value of the price level, then you find that the short- run equilibrium value of the price level equals 1.19258, and the short-run equilibrium value of real GDP equals 11,442.58.g.The long-run equilibrium values of real GDP and the price level are where new aggregate demand and long-run aggregate supply are equal. Since the long-run aggregate supply curve is vertical at natural real GDP and since natural real GDP equals 11,250, the long-run equilibrium value of real GDP is 11,250. The new aggregate demand curve intersects the long-run aggregate supply curve at a price level equal to 1.25, which is the new long-run equilibrium price level.Given that the price level rises from 1.0 to approximately 1.2 in the short-run when aggregate demand increases, then the real wage rate falls from 50 to approximately 50/1.2 = 41.67, given no change in the nominal wage rate. The decline in the real wage rate drives it below the equilibrium real wage rate. That causes the nominal wage rate to rise as workers and firms negotiate new contracts. The rise in the nominal wage shifts the short-run aggregate supply curve left, resulting in a further rise in the price level and a drop in real GDP. The nominal wage rate and the price level continue to rise, while real GDP continues to fall until the real wage rate equals the equilibrium realwage rate, which occurs when the new aggregate demand curve, a short-run aggregate supplycurve, and the long-run aggregate supply curveall intersect at natural real GDP.
Since the real wage rate must equal 50, the equilibrium real wage rate, when the economy is at long-run equilibrium, the nominal wage rate, W, must be such that W/1.25 = 50. Therefore, the newnominal wage rate equals 62.50, given that the new long-run equilibrium price level equals 1.25.
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