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Hakan Yetkiner
http://www.hakanyetkiner.com
Izmir University of Economics
Department of Economics
ECON 202
MACROECONOMIC THEORY
Dr. Yetkiner
25 April 2013
Key to Exercise 05
AD-AS Model
1. Suppose that the following information is given for an economy:
̅)
̅
( )(
̅
(Short-run Aggregate Supply equation)
(Long-run Aggregate Supply equation)
(a) Find the AD equation.
(b) Find the equilibrium
and
values.
(c) Is this economy operating above or below potential GDP.
(i) One needs to first determine IS and LM equations for AD equation. To this end, IS
equation is:
(
(
(
)(
)
)
)
LM equation (for given P) is
or
. Notably, ,
, and
are 3
unknowns in LM equation. If one uses IS equation in LM for eliminating , AD is obtained:
(
)
Clearly, there is a negative relationship between
(ii) Equilibrium values of unknowns in the model:
1
and . This is the AD equation.
Hakan Yetkiner
http://www.hakanyetkiner.com
Izmir University of Economics
Department of Economics
ya da
Since the second solution does not make sense, the answer must be
the model can be found through substitution:
(
(
(
. The rest of
or
)
)
)((
)
(
(
)
)
(
)
)
(iii) Since long run equilibrium is
, short run equilibrium
is lower than
potential GDP. Hence, one must expect prices to decline, which causes a decline in real
wages, among other effects.
2