I = 50 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ĝ = 500, Î= 500. The money market equilibrium curve-or LM curve-is where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplyin M = 10000 units of money, and expected inflation is xª = 0.05. The long-run aggregate supply (LRAS) Y, = 1000. Suddenly, there is a climate shock that changes the marginal propensity to consume (MPC), and tl consumption function changes to C' = 50 +0.8 - (Y – T).
I = 50 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ĝ = 500, Î= 500. The money market equilibrium curve-or LM curve-is where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplyin M = 10000 units of money, and expected inflation is xª = 0.05. The long-run aggregate supply (LRAS) Y, = 1000. Suddenly, there is a climate shock that changes the marginal propensity to consume (MPC), and tl consumption function changes to C' = 50 +0.8 - (Y – T).
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
![C = 50 + 0.9 · (Y – T)
I = 50 – 1000 -r
where Y is real output and r is the real interest rate. Government purchases and taxes are
G = 500, T = 500.
The money market equilibrium curve-or LM curve-is
M Y
P 5i
where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying
M = 10000 units of money, and expected inflation is aº = 0.05. The long-run aggregate supply (LRAS) is
Y, = 1000.
Suddenly, there is a climate shock that changes the marginal propensity to consume (MPC), and the
consumption function changes to
C' = 50 + 0.8 - (Y – T).
1. Explain how the long-run values of (r, i) are determined before the climate shock.
2. Which, if any, of the graphs from Appendix A best depicts the long-run change in the interest rate(s)
due to the climate shock? Explain.
3. Explain how the long-run values of (Y, P) are determined before the climate shock.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F376e14ea-f737-4c70-b3f4-6067093f216a%2F0f5d8c25-8e95-41cf-baaa-9c4bbbf5f0b6%2F0k298f9_processed.png&w=3840&q=75)
Transcribed Image Text:C = 50 + 0.9 · (Y – T)
I = 50 – 1000 -r
where Y is real output and r is the real interest rate. Government purchases and taxes are
G = 500, T = 500.
The money market equilibrium curve-or LM curve-is
M Y
P 5i
where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying
M = 10000 units of money, and expected inflation is aº = 0.05. The long-run aggregate supply (LRAS) is
Y, = 1000.
Suddenly, there is a climate shock that changes the marginal propensity to consume (MPC), and the
consumption function changes to
C' = 50 + 0.8 - (Y – T).
1. Explain how the long-run values of (r, i) are determined before the climate shock.
2. Which, if any, of the graphs from Appendix A best depicts the long-run change in the interest rate(s)
due to the climate shock? Explain.
3. Explain how the long-run values of (Y, P) are determined before the climate shock.
![Appendix A Graphs for Q1.2 and Q2.2
Real
Interest
Real
Interest
Rate
Rate
I(r)
I(r)
I(r)"
Savings/
Investment
Savings/
Investment
(a)
(b)
Real
Nominal
Interest
Rate
IS'
IS
Interest
Rate
IS'
IS
LM
LM
i=r
i'
GDP
GDP
Y' Y
(d)
Y'
(c)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F376e14ea-f737-4c70-b3f4-6067093f216a%2F0f5d8c25-8e95-41cf-baaa-9c4bbbf5f0b6%2Fwpd6trv_processed.png&w=3840&q=75)
Transcribed Image Text:Appendix A Graphs for Q1.2 and Q2.2
Real
Interest
Real
Interest
Rate
Rate
I(r)
I(r)
I(r)"
Savings/
Investment
Savings/
Investment
(a)
(b)
Real
Nominal
Interest
Rate
IS'
IS
Interest
Rate
IS'
IS
LM
LM
i=r
i'
GDP
GDP
Y' Y
(d)
Y'
(c)
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 4 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
![ENGR.ECONOMIC ANALYSIS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
![ENGR.ECONOMIC ANALYSIS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
![Principles of Economics (MindTap Course List)](https://www.bartleby.com/isbn_cover_images/9781305585126/9781305585126_smallCoverImage.gif)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
![Managerial Economics: A Problem Solving Approach](https://www.bartleby.com/isbn_cover_images/9781337106665/9781337106665_smallCoverImage.gif)
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
![Managerial Economics & Business Strategy (Mcgraw-…](https://www.bartleby.com/isbn_cover_images/9781259290619/9781259290619_smallCoverImage.gif)
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education