accounting finance | UK Essay Assignment

Question 1

Deriving AD and AS Curves

AD curve


IS Curve is defined by:


The policy rule on the other hand indicated by the equation:

But financial friction is defined by:

Taking eq(2) and eq(3) we have:

Taking 4 into eq(1) we have the new curve defined as:


AD Curve is defined by the equation:











Aggregate demand curve for the economy defined by



From the first equation, with the specified changes on the monetary policy we have:

The and the   remains as two unknowns within the equation of the graph yielding the following

In the long term equilibrium, the economy assumes the state:

AS Curve


Inflation (π)











The aggregate supply curve is defined by the equation



For the case of the aggregate supply, we have the equation,

In which we need to calculate the previous rates of inflation given the value of the parameters and the current inflation rates to yield the following:


This means that the previous inflation rates equivalent to 3% from the supply curve provided.


For the case of the demand curve, we shall have the situation:



The demand inflation rates equivalent to 2% for the entire period.





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