Answered: Let’s see whether the Keynesian…

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

Let’s see whether the Keynesian conclusions hold under two different
scenarios.
We still assume that (1) Prices were sticky, (2) Money market always clear. Now, instead of assuming that output is
demand determined we use the assumption that OUTPUT IS ALWAYS SUPPLY DETERMINED (in other words, if Y d is
different from Y s, then Y = Y s.)
1. Under this new set up, starting from a classical equilibrium, what is the effect on the interest rate and on output of
a DECREASE in money supply?

Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

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