3. Transition dynamics in the short run. Suppose the economy is initially at a medium-run equilibrium...

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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)?

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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