Consider a closed economy, where wages are sticky in the short run. The consumption function is C = c0 + c1(Y − T ), where the marginal propensity to consume c1 is equal to 0.75. Initially the economy is in equilibrium at Y = Y* and P = P e, where P e is the price level that was expected when agents agreed their fixed nominal wage contracts. The short-run aggregate supply curve (SRAS) is horizontal. Suddenly the government increases government spending G by $500. 1. By how much will output Y change (compared to its initial level before the change in G) in the long run, after wage contracts are renegotiated? 2. By how much will consumption C change (compared to its initial level before the change in G) in the long run, after wage contracts are renegotiated? 3. By how much will investment I change (compared to its initial level before the change in G) in the long run, after wage contracts are renegotiated?
Consider a closed economy, where wages are sticky in the short run. The consumption function is
C = c0 + c1(Y − T ), where the marginal propensity to consume c1 is equal to 0.75. Initially the economy is in equilibrium at Y = Y* and P = P e, where P e is the price level that was expected when agents agreed their fixed nominal wage contracts. The short-run
Suddenly the government increases government spending G by $500.
1. By how much will output Y change (compared to its initial level before the change in G) in the long run, after wage contracts are renegotiated?
2. By how much will consumption C change (compared to its initial level before the change in G) in the long run, after wage contracts are renegotiated?
3. By how much will investment I change (compared to its initial level before the change in G) in the long run, after wage contracts are renegotiated?
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