Assume that due to a negative shock, the economy temporarily rests at a short-run equilibrium where...
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Assume that due to a negative shock, the economy temporarily rests at a short-run equilibrium where output is below its natural level. a. Use the IS-LM model to graphically illustrate and analyse: (i) the behaviour of the economy in the long-run if there is no policy intervention. (3 marks) (ii) the behaviour of the economy in the long-run if fiscal policy is used to return the economy to the natural output level. (3 marks) b. Explain how investment, the interest rate, and the price level differ in the new long-run equilibrium in the two cases. Assume that due to a negative shock, the economy temporarily rests at a short-run equilibrium where output is below its natural level. a. Use the IS-LM model to graphically illustrate and analyse: (i) the behaviour of the economy in the long-run if there is no policy intervention. (3 marks) (ii) the behaviour of the economy in the long-run if fiscal policy is used to return the economy to the natural output level. (3 marks) b. Explain how investment, the interest rate, and the price level differ in the new long-run equilibrium in the two cases.
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a i Without policy intervention Due to the negative shock the IS curve shifts to the left from IS0 t... View the full answer
Related Book For
International Economics
ISBN: 978-1429278447
3rd edition
Authors: Robert C. Feenstra, Alan M. Taylor
Posted Date:
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