Consider the AD-AS model discussed during the lectures. Assume that the aggregate demand curve is given...

 

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Consider the AD-AS model discussed during the lectures. Assume that the aggregate demand curve is given by Y=8-0.5, that the long run aggregate supply curve is given by Yp=7, that the short run aggregate supply curve is given by expect + 0.3(Y-Yp), and that the monetary rule is given by r=1+0.3 (b)Suppose the economy is in equilibrium at the potential level of output, with inflation expectations equal to actual inflation, which equals 2%. As a change in business sentiments, autonomous investments suddenly decrease. Use the model to interpret what happens in the short run and in the long run if the central bank does not intervene exogenously with an expansionary monetary policy. (8 marks) Consider the AD-AS model discussed during the lectures. Assume that the aggregate demand curve is given by Y=8-0.5, that the long run aggregate supply curve is given by Yp=7, that the short run aggregate supply curve is given by expect + 0.3(Y-Yp), and that the monetary rule is given by r=1+0.3 (b)Suppose the economy is in equilibrium at the potential level of output, with inflation expectations equal to actual inflation, which equals 2%. As a change in business sentiments, autonomous investments suddenly decrease. Use the model to interpret what happens in the short run and in the long run if the central bank does not intervene exogenously with an expansionary monetary policy. (8 marks)

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In the short run a decrease in autonomous investments will lead to a decrease in aggregate demand AD ... View the full answer