The Short-Run Aggregate Supply Curve (AS) is given by: y=20p And the Short-Run Aggregate Demand Curve (AD) is given by: y=25,000−20p Suppose instead that the Central Bank wanted to take action to keep the price-level completely stable. This would entail keeping it constant at its current rate. Suppose also that the Central Bank targets the interest rate directly. Suppose also that: • The Marginal Propensity to Spend is 0.75. • Every 1% increase in the interest rate leads to a decrease in Autonomous Consumption of 250 and a decrease in Autonomous Investment of 250. How much would the Central Bank need to change the current interest rate in order to keep the price level from changing through the medium-term as this output gap closes in the economy?
The Short-Run
y=20p
And the Short-Run Aggregate Demand Curve (AD) is given by:
y=25,000−20p
Suppose instead that the Central Bank wanted to take action to keep the
completely stable. This would entail keeping it constant at its current rate. Suppose also that
the Central Bank targets the interest rate directly.
Suppose also that:
• The Marginal Propensity to Spend is 0.75.
• Every 1% increase in the interest rate leads to a decrease in Autonomous Consumption
of 250 and a decrease in Autonomous Investment of 250.
How much would the Central Bank need to change the current interest rate in order to
keep the price level from changing through the medium-term as this output gap closes
in the economy?
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