1. Suppose the economy is in long-run equilibrium and firms become permanently less optimistic about the...
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1. Suppose the economy is in long-run equilibrium and firms become permanently less optimistic about the future marginal revenue products of capital. a. What would this development do to output in the short run? b. What is likely to happen to inflation after a while? c. Following its usual reaction function, how is the Federal Reserve likely to respond? d. When output is back to potential, is r* higher, lower, or the same as before the permanent change in expectations? 1. Suppose the economy is in long-run equilibrium and firms become permanently less optimistic about the future marginal revenue products of capital. a. What would this development do to output in the short run? b. What is likely to happen to inflation after a while? c. Following its usual reaction function, how is the Federal Reserve likely to respond? d. When output is back to potential, is r* higher, lower, or the same as before the permanent change in expectations?
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a In the short run a decrease in firms optimism about the future marginal revenue products of capital would lead to a decrease in output This is because firms would reduce investment in capital goods ... View the full answer
Related Book For
Macroeconomics Principles Applications And Tools
ISBN: 9780134089034
7th Edition
Authors: Arthur O Sullivan, Steven M. Sheffrin, Stephen J. Perez
Posted Date:
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