14. Suppose the economy begins with an output equal to its natural level. Then there is an increase in consumer confidence and households attempt to consume more for a given level of disposable income. a. Using the AS-AD and IS-LM models, show the effects of an increase in consumer confidence on the position of the AD, AS, IS, and LM curves in the short run and the medium run. Precisely label all axes and curves to receive full credit. Label the short-run equilibrium and medium-run equilibrium with SR and MR, respectively. b. Explain the transition process from the short-run equilibrium to the medium-run equilibrium. In particular, discuss what makes the equilibrium changes over time. c. What happens to private saving in the short run? Can private saving increase in the short run even when there is an increase in consumer confidence? If yes, discuss the necessary condition for the higher private saving in the short run. d. What happens to private saving in the medium run compared to its short-run and original levels? Explain carefully.
14. Suppose the economy begins with an output equal to its natural level. Then there is an increase in consumer confidence and households attempt to consume more for a given level of disposable income. a. Using the AS-AD and IS-LM models, show the effects of an increase in consumer confidence on the position of the AD, AS, IS, and LM curves in the short run and the medium run. Precisely label all axes and curves to receive full credit. Label the short-run equilibrium and medium-run equilibrium with SR and MR, respectively. b. Explain the transition process from the short-run equilibrium to the medium-run equilibrium. In particular, discuss what makes the equilibrium changes over time. c. What happens to private saving in the short run? Can private saving increase in the short run even when there is an increase in consumer confidence? If yes, discuss the necessary condition for the higher private saving in the short run. d. What happens to private saving in the medium run compared to its short-run and original levels? Explain carefully.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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a and b
Transcribed Image Text:14. Suppose the economy begins with an output equal to its natural level. Then there is an
increase in consumer confidence and households attempt to consume more for a given level of
disposable income.
a. Using the AS-AD and IS-LM models, show the effects of an increase in consumer
confidence on the position of the AD, AS, IS, and LM curves in the short run and the
medium run. Precisely label all axes and curves to receive full credit. Label the short-run
equilibrium and medium-run equilibrium with SR and MR, respectively.
b. Explain the transition process from the short-run equilibrium to the medium-run
equilibrium. In particular, discuss what makes the equilibrium changes over time.
c. What happens to private saving in the short run? Can private saving increase in the
short run even when there is an increase in consumer confidence? If yes, discuss the
necessary condition for the higher private saving in the short run.
d. What happens to private saving in the medium run compared to its short-run and
original levels? Explain carefully.
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