Most rms borrow money to use for investment. If these rms cannot get loans, they have to reduce their level of investment. Suppose there is a credit crunch like the one experience by many Korean rms in 1997 Asian nancial crisis. The credit crunch limits the amount of money available to be loaned. Hence, rms cannot borrow as much as they would optimally chose to. As a result, the investment schedule shifts to the left. (a) In the Keynesian model, what happens to output and interest rate in the short run? What would happen in the long run? (b) In the Keynesian model, what
Most rms borrow money to use for investment. If these rms cannot get loans, they have to reduce their level of investment. Suppose there is a credit crunch like the one experience by many Korean rms in 1997 Asian nancial crisis. The credit crunch limits the amount of money available to be loaned. Hence, rms cannot borrow as much as they would optimally chose to. As a result, the investment schedule shifts to the left. (a) In the Keynesian model, what happens to output and interest rate in the short run? What would happen in the long run? (b) In the Keynesian model, what
Step by step
Solved in 4 steps with 2 images
