C = 100 + 0.5 - (Y –Ť) I = 500 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are Ĝ = 500, Î = 100. The LM (money market equilibrium) curve is M_Y where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is xª = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to xª = 0.05. 3. Continue to suppose the government doesn't do anything, and the CB wants to stabilise the shock in the short-run but instead of output, the CB wants to bring the nominal interest rate i back to its long-run equilibrium level. Explain whether it should decrease or increase money supply M, and what happens to short-run output Y and the real interest rate r if this policy is followed. 4. Suppose the CB reduces money supply M. Explain how the economy would shift from its short-run to long-run equilibrium. In particular, what happens to output Y, the real interest rate r, and prices P during this process?

C = 100 + 0.5 - (Y –Ť) I = 500 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are Ĝ = 500, Î = 100. The LM (money market equilibrium) curve is M_Y where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is xª = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to xª = 0.05. 3. Continue to suppose the government doesn't do anything, and the CB wants to stabilise the shock in the short-run but instead of output, the CB wants to bring the nominal interest rate i back to its long-run equilibrium level. Explain whether it should decrease or increase money supply M, and what happens to short-run output Y and the real interest rate r if this policy is followed. 4. Suppose the CB reduces money supply M. Explain how the economy would shift from its short-run to long-run equilibrium. In particular, what happens to output Y, the real interest rate r, and prices P during this process?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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