3 Equilibrium in the Cookies Market Consider the classical model we saw in class. Imagine that the supply depends positively on the interest rate, while consumption demand depends negatively. Imagine that the economy is in a position of equilibrium. (i) Consider a temporary decrease in the level of technology (that is Aj decreases but A2 and all future A remain the same). This temporary decrease could represent bad weather (which affects today's supply but not tomorrow's). How will the equilibrium c, y and r in period 1 change? Why? Explain (and use a diagram). (ii) Consider instead a permanent decrease in the level of technology (A1, A2, A3, etc all decrease in the same propor- tion). How will the equilibrium c, y and r in period 1 change? Is your answer different from (i)? If so, why? Explain (and use a diagram). (iii) Consider finally an anticipated increase in A. That is, imagine that while Aj does not increase, we KNOW that A2 and all future A will increase (some better technology has been discovered, but it will not be implemented until next year). How will the equilibrium c, and r, explain why? Explain (and use a diagram) and r in period 1 change? If anything happened to current levels of c, y
3 Equilibrium in the Cookies Market Consider the classical model we saw in class. Imagine that the supply depends positively on the interest rate, while consumption demand depends negatively. Imagine that the economy is in a position of equilibrium. (i) Consider a temporary decrease in the level of technology (that is Aj decreases but A2 and all future A remain the same). This temporary decrease could represent bad weather (which affects today's supply but not tomorrow's). How will the equilibrium c, y and r in period 1 change? Why? Explain (and use a diagram). (ii) Consider instead a permanent decrease in the level of technology (A1, A2, A3, etc all decrease in the same propor- tion). How will the equilibrium c, y and r in period 1 change? Is your answer different from (i)? If so, why? Explain (and use a diagram). (iii) Consider finally an anticipated increase in A. That is, imagine that while Aj does not increase, we KNOW that A2 and all future A will increase (some better technology has been discovered, but it will not be implemented until next year). How will the equilibrium c, and r, explain why? Explain (and use a diagram) and r in period 1 change? If anything happened to current levels of c, y
Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter16: The Influence Of Monetary And Fiscal Policy On Aggregate Demand
Section: Chapter Questions
Problem 8PA
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