(Q1) Besides the SRAS-shift, it can be shown that the AD-curve would shift as well, but in the opposite direction. (a) Applying the law of diminishing marginal productivity of capital (MPK), explain why the destruction of capital stock would stimulate investment demand (i.e., right/up-ward shift in the I-curve). (b) Since investment demand is a component of the demand for loanable funds (recall that Ld = I + NX), the right/up-ward shift in the I-curve would shift the Lª curve in the same direction, thus driving up the interest rate in the loanable-funds market to a level above the real interest in the money market (i.e., credit > -money = Rmoney-g). Explain how to close this interest-rate gap (Ar) via either ONE of the following two alternative adjustments, and then conclude why the AD-curve would shift right/up-ward. i. An adjustment in the price level (P) at any given Yd-level; ii. An adjustment in the level of output demanded (Y) at any given P-level.

(Q1) Besides the SRAS-shift, it can be shown that the AD-curve would shift as well, but in the opposite direction. (a) Applying the law of diminishing marginal productivity of capital (MPK), explain why the destruction of capital stock would stimulate investment demand (i.e., right/up-ward shift in the I-curve). (b) Since investment demand is a component of the demand for loanable funds (recall that Ld = I + NX), the right/up-ward shift in the I-curve would shift the Lª curve in the same direction, thus driving up the interest rate in the loanable-funds market to a level above the real interest in the money market (i.e., credit > -money = Rmoney-g). Explain how to close this interest-rate gap (Ar) via either ONE of the following two alternative adjustments, and then conclude why the AD-curve would shift right/up-ward. i. An adjustment in the price level (P) at any given Yd-level; ii. An adjustment in the level of output demanded (Y) at any given P-level.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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