Assume the economy is at YFE. In the full SR model, IS-LM, show what will happen if firm confidence falls, cet. par. What will happen to the components of the goods market? Use directional arrows to show and explain all these changes. Who should do what if FE is the goal of policy?

Answered: Assume the economy is at YFE. In the…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Assume the economy is at Y_FE. In the full SR model, IS-LM, show what will happen if firm confidence falls, cet. par. What will happen to the components of the goods market? Use directional arrows to show and explain all these changes. Who should do what if FE is the goal of policy?

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If firm confidence is high, then firms tend to spend more on investment, believing that the future return from that investment will be valuable. Similarly, if firm confidence falls, then consumption and investment spending decline.

With a decline in consumption and investment, the goods market will get affected. A decline in consumption and investment, the aggregate demand of the goods market will fall and shifts leftward. Decreasing the price and equilibrium output of the economy.

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