Please ONLY answer V,vi, vii and viii 3. Transition dynamics in the short run.Suppose the economy is initially at a medium-run equilibrium (defined by Y, Un, and ra).Furthermore, suppose we have the usual linear consumption function, C = co + Ci(Y-T), andthere is a sudden boost in consumer confidence, represented by anincrease in co. As we movefrom a medium-run equilibrium to a short-run equilibrium (caused by the increase in co),i.What happens to output (Y), consumption (C), and investment (1)?What happens to the unemployment rate?What happens to the real wage (W/P)?ii.iii.iv.What happens to the natural rate of unemployment and the level of potentialSuppose inflationary expectations are persistent. Should the central bankv.increase or decrease the real interest rate from r, to r,' in order to return theeconomy to the medium-run equilibrium level of output?If the central bank could influence inflationary expectations (i.e., determine 0),would it prefer to set 0=0 or 8=1 if it wants to avoid a recession following theincrease in consumer spending?vi.At the new medium-run equilibrium (Y.', u.', ra'):Are Y,' and u,' greater than, less than, or equal to their initial medium-runequilibrium levels, Y, and u.?How does equilibrium consumption, C(Y,'-T), and investment, I(Y.",rn'), compareto their initial medium-run equilibrium levels, C(Yn-T), and I(Y,rn)?vii.viii.

Fiscal policy refers to the usage of government spending, taxation, and borrowing to persuade the…

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Chapter1: Making Economics Decisions

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Concept explainers

Public Saving

Public saving deals with the amount which has been in excess after meeting all the obligatory expenses and investment of the government. Taxes are collected by the government to meet its day-to-day expenditures. The obligatory expenses include all those expenses which are mandatory for the government. It cannot be avoided as it is inevitable.

Question

Please ONLY answer V,vi, vii and viii

3. Transition dynamics in the short run.
Suppose the economy is initially at a medium-run equilibrium (defined by Y, Un, and ra).
Furthermore, suppose we have the usual linear consumption function, C = co + Ci(Y-T), and
there is a sudden boost in consumer confidence, represented by anincrease in co. As we move
from a medium-run equilibrium to a short-run equilibrium (caused by the increase in co),
i.
What happens to output (Y), consumption (C), and investment (1)?
What happens to the unemployment rate?
What happens to the real wage (W/P)?
ii.
iii.
iv.
What happens to the natural rate of unemployment and the level of potential
Suppose inflationary expectations are persistent. Should the central bank
v.
increase or decrease the real interest rate from r, to r,' in order to return the
economy to the medium-run equilibrium level of output?
If the central bank could influence inflationary expectations (i.e., determine 0),
would it prefer to set 0=0 or 8=1 if it wants to avoid a recession following the
increase in consumer spending?
vi.
At the new medium-run equilibrium (Y.', u.', ra'):
Are Y,' and u,' greater than, less than, or equal to their initial medium-run
equilibrium levels, Y, and u.?
How does equilibrium consumption, C(Y,'-T), and investment, I(Y.",rn'), compare
to their initial medium-run equilibrium levels, C(Yn-T), and I(Y,rn)?
vii.
viii.

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