Assume that the long-run aggregate supply curve is vertical at *Y* = 3,000 while the short-run aggregate supply curve is horizontal at *P* = 1.0. The aggregate demand curve is *Y* = 3(*M*/*P*) and *M* = 1,000.

a.If the economy is initially in long-run equilibrium, what are the values of *P* and *Y*?Illustrate your answers in a diagram.

b. Now suppose a supply shock moves the short-run aggregate supply curve to *P* = 1.5. What are the new short-run *P* and *Y*? Illustrate your answers in a diagram?

c. If the aggregate demand curve and long-run aggregate supply curve are unchanged, what are the long-run equilibrium *P* and *Y* after the supply shock? Illustrate your answers in a diagram?

d.Suppose that after the supply shock the central bank wanted to hold output at its long-run level. What level of *M* would be required? If this level of M were maintained, what would be long-run equilibrium *P* and *Y*? Illustrate your answers in a diagram?