Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Question
Chapter 12, Problem 2PA
(a)
To determine
The impact of invention shock on the income, interest rate, consumption, and investment.
(b)
To determine
The impact of credit card fraud on the income, interest rate, consumption, and investment.
(c)
To determine
The impact of increased savings on the income, interest rate, consumption, and investment.
(d)
To determine
The impact of increased expected inflation rate on the income, interest rate, consumption, and investment.
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Suppose the economy is initially in its long-run equilibrium. Due to the biased (overestimated) expectation of return, the entrepreneurs overwhelmingly become much more aggressive in investment holding other things equal.
a. Use the IS-LM model and AD-AS model to graphically illustrate the impact of the biased expectation in the short run and in the long run. What are the changes in the equilibrium real interest rate, output, and prices?
b. If the central bank wants to offset the impact of the biased expectation, what is the appropriate measure? Draw a graph as in part a. for illustration. What are the changes in the equilibrium real interest rate, output, and prices in this case?
Assume that as a consequence of an IS shock the economy is initially at a point with output above equilibrium (y > ye), and inflation of 4% above a 2% target. By means of a diagram, explain how the central bank will respond to this new information about economic conditions and discuss the effects on the economy.
Suppose the economy is at its long- run equilibrium when there is a sudden increase in wealth. Using IS-MP, AD-IA answer compare the following variables to their initial long-run equilibrium. What happens to short-run real GDP? a) goes up b) goes down c) stays the same d) unknowable What happens to short-run real interest rates? a) goes up b) goes down c) stays the same d) unknowable
What happens to short-run inflation? a) goes up b) goes down c) stays the same d) unknowable What happens to long-run real interest rates? a) goes up b) goes down c) stays the same d) unknowable What happens to long-run inflation? a) goes up b) goes down c) stays the same d) unknowable
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