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Using graphs, explain how interst rate works in the classical system to stabilise aggregate
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- Explain how the interest rate works in the classical system to stabilize aggregate demand in the face of autonomous changes in components of aggregate demand such as investment or government spending.Suppose the economy is in equilibrium, with real interest rates equal to 4% and National Savings equal to $1,600 billion. Furthermore, suppose consumption depends on interest rates. a. Using the classical model, explain, and graphically illustrate how an increase in government spending by $400 billion will affect aggregate demand and aggregate output. b. Using the classical “equation of exchange”, explain how this increase in government spending will affect the inflation rate.In this question, we assume Canada is a closed economy and is in its long-run equilibrium. TransCanada announced that they will not proceed with the East Energy pipeline in October 2017. According to the long-run classical model, what happens to the equilibrium levels of output, real interest rate, and investment in Canada after TransCanada made this announcement? What happens to the real wage in Canada? Explain your answer with the aid of TWOdiagrams - one for the loanable funds market and one for the labour market.
- are these the correct answers? 1) In the classical view, if savings exceeds investment borrowing in the economy interest rates will fall.- true 2) The self adjustment process began with falling wages and then allowed for prices to fall and sales to increase. -true 3)In the classical model, a reduction in AD leads to a new equilibrium at a very low rate of output and employment. -falseUsing a New Classical macroeconomic framework, critically explain the effects of a change in the unobservable component of the money supply on the price level.In the “Classical Theory of Inflation”, what determines the price level and the value of money? Explain using a supply and demand plot.
- .Explain why aggregate demand (AD) curve is negatively sloped by taking the link between the goods market and money marketConsider a country whose economic structure matches the assumptions of the classical model. After reading a recent best-seller documenting a growing population of low-income elderly people who were ill prepared for retirement, most residents of this country decide to increase their saving at any given interest rate. Explain whether or how this could affect the following: a. The current equilibrium interest rate b. Current equilibrium real GDP c. Current equilibrium employment d. Current equilibrium investment e. Future equilibrium real GDPIn this question, we assume Canada is a closed economy and is in its long-run equilibrium. TransCanada announced that they will not proceed with the East Energy pipeline in October 2017. a) According to the long-run classical model, what happens to the equilibrium levels of output, real interest rate, and investment in Canada after TransCanada made this announcement? What happens to the real wage in Canada? Explain your answer with the aid of TWOdiagrams - one for the loanable funds market and one for the labour market. b) (Continued from part a) As time passes (i.e., in the very long run which will be 10-15 years from now), what happens to the stocks of productive inputs in Canada? How would this change in the stocks of productive inputs affect the equilibrium levels of output and real interest rate in Canada? What happens to the real wage in Canada? Explain, and support your answer by a new set of loanable funds market and one for the labour market diagrams
- With reference to the Keynesian approach, explain the main components of aggregate demandConsider an economy described by the following equations. Y=C+I+G C=100+.75(Y−T) I=500−50r G=125 T=100 Where: Y is GDP, C is consumption, I is investment, G is government spending, T is taxes and r is the rate of interest. Question: In this case, explain the policy that was used by the policymaker to target the aggregate demand.Concerning the Great Depression; the stock market crash of 1929, collapse of the banking system, and collapse of the money supply all were factors that could be modeled as a leftward shift of SRAS a rightward shift of SRAS a leftward shift of AD a rightward shift of AD
