C = 100 + 0.5 - (Y – T) I = 500 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, T= 100. The LM (money market equilibrium) curve is Y P 5i 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 a = 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 a = 0.05. 1. Explain how the short-run values of (r, i) are determined before the vaccine news shock. 2. Which, if any, of the graphs from Appendix C best depicts the change in the Keynesian cross due to the vaccine news shock? Explain. 3. Which, if any, of the graphs from Appendix A best depicts the short-run change in the interest rate(s) due to the vaccine news shock? Explain.

C = 100 + 0.5 - (Y – T) I = 500 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, T= 100. The LM (money market equilibrium) curve is Y P 5i 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 a = 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 a = 0.05. 1. Explain how the short-run values of (r, i) are determined before the vaccine news shock. 2. Which, if any, of the graphs from Appendix C best depicts the change in the Keynesian cross due to the vaccine news shock? Explain. 3. Which, if any, of the graphs from Appendix A best depicts the short-run change in the interest rate(s) due to the vaccine news shock? Explain.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Appendix A Graphs for Q1.2 and Q2.3
Real
Interest
Rate
Real
Ierest
Rate
Saving
Investment
Savings
Invesment
(a)
(b)
Real
Interest
Rate
Nominal
nterest
Rate
IS'
IS
LM
LM
Appendix B Graphs for Q1.3 and Q2.4
Pricet
level
Picet
level
GDP
GDP
(e)
(4)
P
Appendix C Graphs for Q2.2
GDP
GDP
(a)
(b)
Expendre
Expenduret
Actual Expenditure
Actual Expendiure
PE
Pricet
level
Pricet
level
PE
-PE
PE
Income
Ouput
Income
Ouput
(a)
(b)
GOP
GDP
Expendre
Expendiret
Actual Expenditure
Actual Expenditure
(c)
(d)
PE
Income
Ouput
Incomel
Output
(e)
(d)

C = 100 + 0.5 - (Y – T)
I = 500 – 1000 -r
where Y is real output and r is the real interest rate. Government purchases and taxes are
G = 500, Ť= 100.
The LM (money market equilibrium) curve is
M Y
P
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 a = 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 = 0.05.
1. Explain how the short-run values of (r, i) are determined before the vaccine news shock.
2. Which, if any, of the graphs from Appendix C best depicts the change in the Keynesian cross due to
the vaccine news shock? Explain.
3. Which, if any, of the graphs from Appendix A best depicts the short-run change in the interest rate(s)
due to the vaccine news shock? Explain.
4. Which, if any, of the graphs from Appendix B best depicts the short-run change in output and price
due to the vaccine news shock? Explain.
5. What are the effects of the shock on the short-run equilibrium values of output Y, consumption C,
investment I, real interest rate r and price P? Do not give any numerical answers, just fill in
the following table with +, - or 0 to indicate whether each variable increases (+), decreases (-), or
doesn't change (0). There are 6 blanks to fill.
Y CITI P
change:

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C = 100 + 0.5 - (Y –T) I = 500 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are Ĝ = 500, Ť= 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 “ = 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…
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