Suppose the U.S. economy is in equilibrium at the long-run real interest rate that prevails when aggregate expenditures equal potential output. Draw a diagram of aggregate expenditures showing this initial equilibrium. Then suppose that foreign demand for U.S. exports falls due to a recession abroad. Show how the long-run real interest rate will change and explain your results.
Answer to relevant QuestionsExplain why the short-run aggregate supply curve is upward sloping. Under what circumstances might it be vertical? State whether each of the following will result in a movement along or a shift in the monetary policy reaction curve and in which direction the effect will be.(a) Policymakers increase the real interest rate in response to a ...You read a story in the newspaper blaming the central bank for pushing the economy into recession. The article goes on to mention that not only has output fallen below its potential level but that inflation had also risen. ...Explain why the rise in oil prices in 2008 created a particularly difficult situation for Federal Reserve policymakers. *Suppose a natural disaster reduces the productive capacity of the economy. How would the equilibrium long-run real interest rate be affected? Assuming the central bank maintains its existing inflation target, illustrate the ...
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