Consider the following version of the IS-LM AD-AS framework. Assume the economy has a full employment output of Y*=4,600 Р ma=0.5Y – 200(r+re) C=1275+ 0.5(Y-T) - 200r I=900-200r T=G=450 Where the expected rate of inflation, te= 0 and the nominal supply of money M=9,000. 1. Use the IS and LM equations to find the equation of the Aggregate Demand curve that shows the relationship between Y and P. Sketch your solutions for IS, LM, and AD on a graph.
2. Use the fact in the long run-equilibrium Y is equal to the full employment level of output Y*=4,600. Calculate the long run equilibrium values of r, the price level, consumption, and investment.
