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Elucidate short-run effects of output and real interest rate with given various situations including graphical analysis.

Suppose that the price level is fixed in the short run so that the economy doesn't reach general equilibrium immediately after a change in the economy. Assume that in the short run firms are willing to produce enough output to meet the aggregate demand for goods. Assume that the goods market and asset market are always in equilibrium.

For each of the following changes, what are the short run effects on output and the real interest rate?

Note: to answer this problem, use the graphical analysis that we developed in class to analyze equilibrium in the goods market (Aggregate demand/supply) and the asset market (Money supply-money demand). Make sure your graphs are complete, well labeled, and clear. Ideally, you would be using two graphs for each answer. You can also provide a sentence or two to accompany your answer.

a.A decrease in consumer optimism that decreases desired consumption at each level of income and the real interest rate. The money demand function does not change.

b.A rise in expected inflation by consumers.

1.A new law that gives corporations a tax breaks for new investment in physical capital.

2.Commercial banks become more cautious and decide to hold reserves above and beyond what is required by law.

3.An increase in taxes, with no change in government purchases. Consider both the case in which Ricardian equivalence holds and the case in which it doesn't.

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M922661

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