Assume that the long-run level of output is Y = 1000, which the economy is also at initially in the short-run. Suppose that the consumptionand investment functions are, respectivley,C = 100 + 0.8(Y – T),I = 100 – 2000r,that is, MPC is 0.8. Furthermore, the LM (money market equilibrium) curve isM.P200The government is currently implementing a policyG = 80,Ť = 50,and the central bank (CB) is supplying M = 1000.Expected inflation is n = 0.Continuing from Part 1, due to the uncertainty surrounding the coronavirus, consumers tighten their belts and consumption functionchanges toC = 40 + 0.8(Y – T).Focus only on the economy's short-run responses, that is, when the price level P cannot adjust.Continue to assume that the government does nothing, but now the CB wants to acnieve the nighest possible level of output, Y, withoutsetting negative interest rates.a) The highest possible level of output the CB can achieve isat an interest rate of6.b) The CB must react bymoney supply, toc) Due to the CB's monetary policy, the LM curved) Consumtpion, C, changes toe) Private investment, I, changes to

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Focus only on the economy's short-run responses, that is, when the price level P cannot adjust. Continue to assume that the government does nothing, but now the CB wants to achieve the nighest possible level of output, x, without setting negative interest rates. a) The highest possible level of output the CB can achieve is b) The CB must react by money supply, to c) Due to the CB's monetary policy, the LM curve at an interest rate of

Focus only on the economy's short-run responses, that is, when the price level P cannot adjust. Continue to assume that the government does nothing, but now the CB wants to achieve the nighest possible level of output, x, without setting negative interest rates. a) The highest possible level of output the CB can achieve is b) The CB must react by money supply, to c) Due to the CB's monetary policy, the LM curve at an interest rate of

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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ANSWER NUMBER 4 ONLY
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