Consider our medium-run model of the economy: Y = C(YT)+I(Y,r+x) +G F=F πtπt-1 = ()(x - Yn) (IS) (LM) (PC) Suppose the economy starts at a point such that Xt = Yn and r = m. a. Graph the effects of a decrease in government spending, G. What happens to output, the interest rate, and inflation in the short-run? b. What happens in the medium-run?

Consider our medium-run model of the economy: Y = C(YT)+I(Y,r+x) +G F=F πtπt-1 = ()(x - Yn) (IS) (LM) (PC) Suppose the economy starts at a point such that Xt = Yn and r = m. a. Graph the effects of a decrease in government spending, G. What happens to output, the interest rate, and inflation in the short-run? b. What happens in the medium-run?

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Chapter1: Making Economics Decisions

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Question

Consider our medium-run model of the economy:
-
Y = C(Y − T)+I(Y,r+x) +G
= F
πt πt-1 =
(†)(x — Yn)
-
(IS)
(LM)
(PC)
Suppose the economy starts at a point such that Xt = Yn and r =
m.
a. Graph the effects of a decrease in government spending, G. What happens to output,
the interest rate, and inflation in the short-run?
b. What happens in the medium-run?
c. What mechanism causes the transition from the short-run equilibrium to the medium-
run equilibrium?
d. What does the transition from the short-run to medium-run imply about the ability of
fiscal p

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