SECTION A The following economy applies to questions 1-3. Assume an economy in which the con-sumption (C) and investment (I) functions are given byC = 100 + 0.5 · (Y – T)I = 500 – 1000 -rwhere Y is real output and r is the real interest rate. Government purchases and taxes areĞ = 500, Ť = 100.The LM (money market equilibrium) curve isMY%3DP5iwhere P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplyingM = 8000 units of money, and expected inflation is n° = 0.Assume that the long-run equilibrium level of output is Ý = 2000. Short-run equilibrium output is initiallyat the same level (Y = 2000).Suddenly, news of a new world-beating super-vaccine raises expected inflation to nº = 0.05.Question 1 Derive the long-run equilibrium values of output Y, consumption C, private and publicsavings Sprivate and Spublic, investment I, the real and nominal interest rates (r, i) and price P, before andafter the vaccine news shock. In particular:1. Explain how the long-run values of (r, i) are determined before the vaccine news shock.2. Which, if any, of the graphs from Appendix A best depicts the long-run change in the interest rate(s)due to the vaccine news shock? Explain.3. Explain how the long-run values of (Y, P) are determined before the vaccine news shock. Appendix A Graphs for Q1.2RealInterestRateRealInterestRateI(r)rr'I(r)r'I(r)'Savings/InvestmentSavings/InvestmentSS'(a)(b)RealNominalISIS'InterestISIS'InterestRateRateLMLMr'i'i=rrr'GDPGDPYY'YY'(c)(d)

The IS curve establishes a relation between income level and interest rate for the commodity market…

1. Explain how the long-run values of (r, i) are determined before the vaccine news shock. 2. Which, if any, of the graphs from Appendix A best depicts the long-run change in the interest rate(s) due to the vaccine news shock? Explain. 3. Explain how the long-run values of (Y, P) are determined before the vaccine news shock.

1. Explain how the long-run values of (r, i) are determined before the vaccine news shock. 2. Which, if any, of the graphs from Appendix A best depicts the long-run change in the interest rate(s) due to the vaccine news shock? Explain. 3. Explain how the long-run values of (Y, P) are determined before the vaccine news shock.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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