C= 50 + 0.9 - (Y – TŤ) I = 50 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are G=500, Î = 500. The money market equilibrium curve-or LM curve-is where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 10000 units of money, and expected inflation is zª = 0.05. The long-run aggregate supply (LRAS) is Y, = 1000. Suddenly, there is a climate shock that changes the marginal propensity to consume (MPC), and the consumption function changes to C' = 50 + 0.8 · (Y – Î). What are the effects of the shock on the short-run equilibrium values of output Y, consumption C, investment 1, 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. You do not need to create a table when you type your answers, but please clearly indicate the name of each variable followed by +, – or 0. Y CIri P change:

C= 50 + 0.9 - (Y – TŤ) I = 50 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are G=500, Î = 500. The money market equilibrium curve-or LM curve-is where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 10000 units of money, and expected inflation is zª = 0.05. The long-run aggregate supply (LRAS) is Y, = 1000. Suddenly, there is a climate shock that changes the marginal propensity to consume (MPC), and the consumption function changes to C' = 50 + 0.8 · (Y – Î). What are the effects of the shock on the short-run equilibrium values of output Y, consumption C, investment 1, 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. You do not need to create a table when you type your answers, but please clearly indicate the name of each variable followed by +, – or 0. Y CIri P change:

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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