please answer (i)(ii) 3 Equilibrium in the Cookies MarketConsider the classical model we saw in class. Imagine that the supply depends positively on the interest rate, whileconsumption 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 thesame). 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 thatA2 and all future A will increase (some better technology has been discovered, but it will not be implemented untilnext 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

Answered: 3 Equilibrium in the Cookies Market…

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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please answer (i)(ii)

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

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Introduction

Before the Great Depression, the Classical Model was popular. It claims that the economy is very free-flowing and that prices and salaries respond easily to demand fluctuations over time. To put it another way, when things are good, wages and prices rise swiftly, and when times are bad, wages and prices fall easily.

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