General Equilibrium is a situation in which all market in an economy are simultaneously in equilibrium (both the good market and the money market in equilibrium, as shown below). Now suppose the U.S. economy is now shown at the intersection of the IS and LM curves. Now President Joe Biden passed his Infrastructure bill. Please use graph to explain how such a bill may affect the economy in the long run and short run, in terms of price level, P, output Y and interest rate r. Please also add the AD-AS analysis with your argument. ### Diagram Explanation: IS-LM-FE Model#### OverviewThe diagram is a representation of the IS-LM-FE model, commonly used in macroeconomics to illustrate the interactions between interest rates, output, and financial markets in the short and long run.#### Axes- **Vertical Axis (r):** Represents the interest rate.- **Horizontal Axis (Y):** Represents national income or output.#### Curves- **IS Curve:** Downward sloping line indicating combinations of interest rates and output where the goods market is in equilibrium. A lower interest rate leads to higher investment and, subsequently, higher output. - **LM Curve:** Upward sloping line indicating combinations of interest rates and output where the money market is in equilibrium. As output increases, the demand for money increases, which raises the interest rate.- **FE Line:** Vertical line indicating full employment output. It shows the level of output at which all resources are utilized efficiently, irrespective of the interest rate. This line remains constant since it represents the economy's long-term potential output.#### Intersection- The intersection of these three lines represents the general equilibrium in the economy, where the goods market, money market, and labor market are all in balance. At this point, the economy operates at full employment with corresponding interest rates and output levels.This model helps illustrate how monetary and fiscal policy can affect economic variables, providing a framework for analyzing macroeconomic conditions.

If the infrastructure bill has been passed, it would mean there would be an influx of the funds in…

Answered: FE LM IS -Y

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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General Equilibrium is a situation in which all market in an economy are simultaneously in equilibrium (both the good market and the money market in equilibrium, as shown below). Now suppose the U.S. economy is now shown at the intersection of the IS and LM curves. Now President Joe Biden passed his Infrastructure bill. Please use graph to explain how such a bill may affect the economy in the long run and short run, in terms of price level, P, output Y and interest rate r. Please also add the AD-AS analysis with your argument.

### Diagram Explanation: IS-LM-FE Model

#### Overview
The diagram is a representation of the IS-LM-FE model, commonly used in macroeconomics to illustrate the interactions between interest rates, output, and financial markets in the short and long run.

#### Axes
- **Vertical Axis (r):** Represents the interest rate.
- **Horizontal Axis (Y):** Represents national income or output.

#### Curves
- **IS Curve:** Downward sloping line indicating combinations of interest rates and output where the goods market is in equilibrium. A lower interest rate leads to higher investment and, subsequently, higher output.

- **LM Curve:** Upward sloping line indicating combinations of interest rates and output where the money market is in equilibrium. As output increases, the demand for money increases, which raises the interest rate.

- **FE Line:** Vertical line indicating full employment output. It shows the level of output at which all resources are utilized efficiently, irrespective of the interest rate. This line remains constant since it represents the economy's long-term potential output.

#### Intersection
- The intersection of these three lines represents the general equilibrium in the economy, where the goods market, money market, and labor market are all in balance. At this point, the economy operates at full employment with corresponding interest rates and output levels.

This model helps illustrate how monetary and fiscal policy can affect economic variables, providing a framework for analyzing macroeconomic conditions.

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