C = 100 + 0.5 - (Y – T) I= 200 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ĝ = 300, T = 200. The LM (money market equilibrium) curve is P 101 where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 2000 units of money, and expected inflation is z“ = 0.02. Assume that the long-run equilibrium level of output is Ÿ = 1000. Short-run equilibrium output is initially at the same level (Y = 1000). Suddenly, news of a new world-beating super-vaccine raises the investment function to I = 250 – 1000 - r 1. Suppose the government (not the CB) wants to stabilise the shock in the long-run, meaning it wants the real interest rate to be the same as before the shock. Explain whether it should increase the government deficit (AĞ > AT) or reduce it (AĞ < AT), and how it works. 2. Suppose the government follows the policy you prescribed above. Explain how the economy would shift from its short-run to long-run equilibrium. In particular, what happens to output Y, the real interest rate r, and prices P during this process?

C = 100 + 0.5 - (Y – T) I= 200 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ĝ = 300, T = 200. The LM (money market equilibrium) curve is P 101 where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 2000 units of money, and expected inflation is z“ = 0.02. Assume that the long-run equilibrium level of output is Ÿ = 1000. Short-run equilibrium output is initially at the same level (Y = 1000). Suddenly, news of a new world-beating super-vaccine raises the investment function to I = 250 – 1000 - r 1. Suppose the government (not the CB) wants to stabilise the shock in the long-run, meaning it wants the real interest rate to be the same as before the shock. Explain whether it should increase the government deficit (AĞ > AT) or reduce it (AĞ < AT), and how it works. 2. Suppose the government follows the policy you prescribed above. Explain how the economy would shift from its short-run to long-run equilibrium. In particular, what happens to output Y, the real interest rate r, and prices P during this process?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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