Draw your IS-LM-PC model in the medium run equilibrium. Assume we are working with a time period where π = . Label your initial equilibrium point A, call your medium run output Y, your medium run real interest rate a. Suppose transfer payments decrease permanently. Draw the impact of the change on your diagram. Label your short run point B on both your IS-LM and PC graph. b. Where are output, unemployment, and inflation with respect to the medium run levels. (Above, below, same level?) c. To return to the medium run level of output, what must the Fed do? d. Draw your answer to c) on your original diagram and label your new equilibrium point C. e. Briefly explain.

Draw your IS-LM-PC model in the medium run equilibrium. Assume we are working with a time period where π = . Label your initial equilibrium point A, call your medium run output Y, your medium run real interest rate a. Suppose transfer payments decrease permanently. Draw the impact of the change on your diagram. Label your short run point B on both your IS-LM and PC graph. b. Where are output, unemployment, and inflation with respect to the medium run levels. (Above, below, same level?) c. To return to the medium run level of output, what must the Fed do? d. Draw your answer to c) on your original diagram and label your new equilibrium point C. e. Briefly 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

Draw your IS-LM-PC model in the medium run equilibrium. Assume we are working with
a time period where π = π. Label your initial equilibrium point A, call your medium run
output Y, your medium run real interest rate n.
a. Suppose transfer payments decrease permanently. Draw the impact of the
change on your diagram. Label your short run point B on both your IS-LM and PC
graph.
b. Where are output, unemployment, and inflation with respect to the medium run
levels. (Above, below, same level?)
c. To return to the medium run level of output, what must the Fed do?
d. Draw your answer to c) on your original diagram and label your new equilibrium
point C.
e. Briefly explain.

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