Suppose that we have the following behaviour equation C=100 + 0.75 (Y-T); t=50-25t; g=50, t=50. Money demand: M-p=Y-100i (instead of m/p. I write the demand curve in M-P for convenient calculation.

Question

Money supply; M=100

P=P+Y-625, where P is the expected price.

a. Solve for the medium run equilibrium output Y and interest rat I and price level P.

b. suppose in 2017, the economy is initially in the medium run equilibrium found in part a. In the year 2018, money supply changes to M= 1300. solve for equilibrium output and draw a diagram with clear mark and AD curve, AS Curve for year 2017, 2018, and 2019, and the new medium run.

c. suppose in the year 2017, the economy is initially in the medium run equilibrium found in part a. The AS curve changes to P=P+Y-700 in 2018(M=1000). Solve for the equilibrium output and price. Draw diagram with clear marks of AD and AS Curve for year 2017, 2018, and 2019, and the new medium run.

Answer 1

I am happy to help you out here with these difference equations but you have some typos which makes it difficult to decipher. If you resubmit without the typos I would be more than happy to show you how to solve the static and dynamic solutions. I used to teach this stuff at Tufts University with Dornbusch and Discher as a textbook.