One AD-AS economy is described by the following behavioral equations
C=4+0.7(Y-T), I=238+0.15Y-500i, T=1000, G=1280, M=42000, (M/P)d =12+0.8Y-600i; F(u, z)=(z/300)-10u, Y=2N, the expected price level is Pe=8, the mark-up for pricing is =0.25, the number of workers in the labor force is L=3000 and the social protection indicator (average monthly unemployment benefit in $) is z=660 dollars. a) Find the numerical values of the natural level of output and the natural rate of unemployment. b) Derive the AS relation. c) Derive the AD relation and graph both the AD and AS curves in a (P, Y) diagram. d) Find the short-run equilibrium values for Y, P, C, I, M/P, i, W, N and u. Is the economy producing at its natural capacity? Why? e) How is the economy going to return to a medium-run equilibrium? Allow P e to adjust, and find the (AD)-(AS) intersection consistent with the new medium-run equilibrium, obtaining values for Y, P, C, I, M/P, i, W, N and u. Plot the mediumrun equilibrium in the same diagram of section c). f) Suppose that the economy is in the short-run equilibrium found in d) and the government does not want to wait for the adjustment of price expectations described in v). Design a fiscal policy to reach a medium-run equilibrium with no revision of price expectations (keep P e=8). Obtain values for Y, P, C, I, M/P, i, W, N and u, and plot the medium-run equilibrium in the same diagram of section c). g) Suppose that the economy is in the short-run equilibrium found in d) and the central bank does not want to wait for the adjustment of price expectations described in e). Design a monetary policy to reach a medium-run equilibrium with no revision of price expectations (keep Pe=8). Obtain values for Y, P, C, I, M/P, i, W, N and u, and plot the medium-run equilibrium in the same diagram of section c).