# natural level of output

Hello,

I need help on the problem below. c and d are just parameters, we don’t need to find a value for them

in a

Consider the following model of the economy (we ignore the role of G and T on demand; also to simply the algebra we assume that output depends on the difference between M and P rather than their ratio):

AS: P=Pe + d(Y-Yn)

a)        What is the natural level of output? If nominal money is equal to Mo, what is the initial price level? Call this initial Price level Po. Assume the expected Price level is the initial price level.

B)           solve for the equilibrium value of output in the short run

c)           what happens to investment behind the scene? Explain in words

d)           solve for the equilibrium value of output in the medium run

e)           what happens to investment in the medium run. Explain in words.

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