Use the classical model and the quantity theory of money to predict how each of the following shocks would affect real aggregate income (Y), the real interest rate (r), and the price of goods and services (P) in a closed economy in the long run, all else equal. For each shock, be sure to clearly state a prediction for all three variables (up, down, or no change) and illustrate your predictions with supply/demand diagrams for the goods market and the loan able funds market.

a. An increase in total factor productivity (A up).

b. An increase in the income velocity of money (V up).

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a An increase in total factor productivity A up 1 As long Aggregate income confines to the total of ... View the full answer