3. Transition dynamics in the short run. Suppose the economy is initially at a medium-run equilibrium...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
3. Transition dynamics in the short run. Suppose the economy is initially at a medium-run equilibrium (defined by Y, U, and ra). Furthermore, suppose we have the usual linear consumption function, C = Co + c₂(Y-T), and there is a sudden boost in consumer confidence, represented by an increase in co. As we move from a medium-run equilibrium to a short-run equilibrium (caused by the increase in co), i. ii. iii. iv. V. vi. What happens to output (Y), consumption (C), and investment (I)? What happens to the unemployment rate? What happens to the real wage (W/P)? What happens to the natural rate of unemployment and the level of potential output? Suppose inflationary expectations are persistent. Should the central bank. increase or decrease the real interest rate from ra to ra in order to return the economy to the medium-run equilibrium level of output? If the central bank could influence inflationary expectations (i.e., determine 8), would it prefer to set 0-0 or 0=1 if it wants to avoid a recession following the increase in consumer spending? At the new medium-run equilibrium (Y., un', '): vii. viii. Are Y. and un greater than, less than, or equal to their initial medium-run equilibrium levels, Y. and un? How does equilibrium consumption, C(Y-T), and investment, I(Y.,r), compare to their initial medium-run equilibrium levels, C(Y-T), and I(Y)? 3. Transition dynamics in the short run. Suppose the economy is initially at a medium-run equilibrium (defined by Y, U, and ra). Furthermore, suppose we have the usual linear consumption function, C = Co + c₂(Y-T), and there is a sudden boost in consumer confidence, represented by an increase in co. As we move from a medium-run equilibrium to a short-run equilibrium (caused by the increase in co), i. ii. iii. iv. V. vi. What happens to output (Y), consumption (C), and investment (I)? What happens to the unemployment rate? What happens to the real wage (W/P)? What happens to the natural rate of unemployment and the level of potential output? Suppose inflationary expectations are persistent. Should the central bank. increase or decrease the real interest rate from ra to ra in order to return the economy to the medium-run equilibrium level of output? If the central bank could influence inflationary expectations (i.e., determine 8), would it prefer to set 0-0 or 0=1 if it wants to avoid a recession following the increase in consumer spending? At the new medium-run equilibrium (Y., un', '): vii. viii. Are Y. and un greater than, less than, or equal to their initial medium-run equilibrium levels, Y. and un? How does equilibrium consumption, C(Y-T), and investment, I(Y.,r), compare to their initial medium-run equilibrium levels, C(Y-T), and I(Y)?
Expert Answer:
Answer rating: 100% (QA)
There is a sudden boost in the consumer confindence Co has rised So in the short run i Since CCo C1 ... View the full answer
Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba
Posted Date:
Students also viewed these economics questions
-
Suppose that uncovered interest parity holds all the time (both in the short run and in the long run), while the purchasing power parity holds only in the long run, because prices are sticky in the...
-
Suppose that the price level is fixed in the short run so that the economy does not reach general equilibrium immediately after a change in the economy. For each of the following changes, what are...
-
Suppose that Koreas economy is initially in a long-run equilibrium. Then the countrys Ministry of Strategy and Finance decides to increases the government purchases. a. Using the Keynesian cross,...
-
What is the rate of change of the area of a circle (A = r 2 ) with respect to the radius when the radius is r = 3?
-
What keeps plotted revenue data from falling on a straight line in a break-even analysis?
-
For the circuit of Fig.4.141 (a) Does VC increase or decrease if RB is increased? (b) Does IC increase or decrease if β is reduced? (c) What happens to the saturation current if...
-
Indicate by letters the type of fraud committed: Check tampering (CT) Cash register scheme (CR) Expense scheme (E) Bribe (B) Fraudulent financial reporting (F) Here is an example: CT Employee writes...
-
Cellular telephone service has certainly become more important vis--vis wired telephone service over the past decade. Will this trend continue? How will the trend toward cellular service be affected...
-
A coupon bond has a face value of $1,000.with a 4.83% coupon rate. It matures in 7 years and has a yield to maturity of 7.33%. What is the price of the bond?
-
The following is the statement of financial position of WW Associates as at 31 December 2008: During 2009, the following transactions took place: 1 The owners withdrew equity in the form of cash of...
-
The portfolio manager of DRW in the Montreal branch is interested in constructing a new portfolio in the US market in May 2021. She plans to hold the portfolio for one year. On 17 May 2021, she...
-
With renewable energy set to grow further in the coming years, what more could insurance firms do to encourage take up?
-
Can you think of any emerging trends that may open up more opportunities for motor insurers to promote environmental sustainability
-
How might the different corporate forms outlined above affect how a bank sees its role in relation to the environment?
-
Can you think of any insurance products or services that might fit with our definition of green insurance?
-
What might be considered as green insurance?
-
6. (a) Implement the basic radiosity algorithm for rendering the inside surfaces of a cube when one inside face of the cube is a light source. (b) Write a program (using any common high-level...
-
Pappa's Appliances uses the periodic inventory system. Details regarding the inventory of appliances at January 1, purchases invoices during the year, and the inventory count at December 31 are...
-
Consider my wifes tastes for grits and cereal. A: Unlike me, my wife likes both grits and cereal, but for her, averages (between equally preferred bundles) are worse than extremes. (a) On a graph...
-
Entrepreneurial Skill and Market Conditions: We often treat all firms as if they must inherently face the same costsbut managerial, or entrepreneurial, skill in firms can sometimes lead to a decrease...
-
We developed our first graphical model of adverse selection in the context of car insurance in section 22A.2 where we assumed that the marginal cost MC1 of providing car insurance to unsafe drivers...
-
A stepped bar, fixed at \(x=0\) and free at \(x=l\), has a cross-sectional area of \(2 A\) for \(0 \leq x
-
Estimate the fundamental frequency for the longitudinal vibration of a uniform bar fixed at \(x=0\) and free at \(x=l\) by assuming the mode shapes as (a) \(U(x)=c_{1}(x / l)\) and (b) \(U(x)=c_{1}(x...
-
Estimate the fundamental frequency of a fixed-fixed string, assuming the mode shape (a) \(W(x)=c_{1} x(l-x)\) and (b) \(W(x)=c_{1} x(l-x)+c_{2} x^{2}(l-x)^{2}\).
Study smarter with the SolutionInn App