Consider a closed Keynesian economy. Draw an IS-LM diagram and mark the initial point as "0". Then: (A) Assume firms become more pessimistic about the future marginal product of capital. Graph the impact in the ISLM diagram (point “A") and explain the short run effects on Y, r, and P. (B) Explain how the economy will adjust in the longer run. Determine the long run effects on Y, r, and P. Mark the equilibrium as "B". (C) Suppose central bank responds to the disturbance in (A) in a way designed to keep output at its initial level. Explain what policy action the central bank must take. Mark the resulting equilibrium as “C". Organize your answers as shown below: ISLM diagram Table with directional answers: Direction of change |(up,down, unchanged, uncertain) Part (A) Part (B) Output Real interest rate Price level [If you entered "uncertain", explain here.] (A) Explain: (B) Explain: (C) Policy Action: (C) Explain:

Consider a closed Keynesian economy. Draw an IS-LM diagram and mark the initial point as "0". Then: (A) Assume firms become more pessimistic about the future marginal product of capital. Graph the impact in the ISLM diagram (point “A") and explain the short run effects on Y, r, and P. (B) Explain how the economy will adjust in the longer run. Determine the long run effects on Y, r, and P. Mark the equilibrium as "B". (C) Suppose central bank responds to the disturbance in (A) in a way designed to keep output at its initial level. Explain what policy action the central bank must take. Mark the resulting equilibrium as “C". Organize your answers as shown below: ISLM diagram Table with directional answers: Direction of change |(up,down, unchanged, uncertain) Part (A) Part (B) Output Real interest rate Price level [If you entered "uncertain", explain here.] (A) Explain: (B) Explain: (C) Policy Action: (C) Explain:

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter16: Monetary Policy

Section16.A: Policy Disputes Using The Self Correcting Aggregate Demand And Supply Model

Problem 15SQ

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