the economics of money, banking, and financial markets

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24.9 APPENDIX 24.2 Aggregate Demand and Supply: A Numerical Example

1. Consider the following aggregate demand curve Y= 22-1p and a short-run aggregate supply
   curve given by: p=4+3(Y-10). Find the equilibrium output and inflation rate.
   Answer: Y=22-pi. Subsitutate in pi from the short run aggregate supply curve.
   Y=22-(4+3(Y-10))
   Y=22- 4 - 3Y+30
   Y+3Y=48
   4Y=48
   Y=12

Plug this into the aggregate supply curve
p=4+3(Y-10)
p=4+3(12-10)
p=4+3(2)
p=10
Diff: 2 Type: SA Page Ref: 24.2A- 2
Skill: Applied
Objective List: 24.1 Interpret the aggregate demand and supply framework for the determination
of aggregate output and the inflation rate

24.10 APPENDIX 24.3 The Algebra of the Aggregate Demand and Supply Model

1. Enumerate the four implications for aggregate output from algebraic expression of the
   aggregate demand curve.
   Answer:

1. The aggregate demand curve slopes downward.


2. The more willing monetary policymakers are to raise interest rates when faced with inflation,
   the steeper the AD curve is.


3. C, -mpc × T, -df, G and NX shift the aggregate demand curve by exactly the same amount and
   in the same direction as they shift the IS curve.


4. An autonomous easing of monetary policy results in a higher level of equilibrium output,
   shifting the aggregate demand curve to the right.
   Diff: 2 Type: SA Page Ref: 24.3A- 2
   Skill: Recall
   Objective List: Appendix: The Algebra of the Aggregate Demand and Supply Model