Figure 1 shows a closed economy that is described by the following relations: Z = C(YT)...

   

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Figure 1 shows a closed economy that is described by the following relations: Z = C(YT) + I(Y, r + x) + G Md PL(Y,r+ π²) W = P² F(u, z) P = (1 + m)W Y = N = with the following definitions in place: rin and u = 1- . The central bank targets the real policy rate F. (a) Which conditions need to hold in order for the economy to be in short-run equilibrium? Which conditions need to hold in order for the economy to be in medium-run equilibrium? If the economy is in short-run equilibrium, is it also in medium-run equilibrium? (b) Suppose that consumer confidence decreases, modeled as a decrease in auto- nomous consumption for simplicity. Let (Y,r) = (Y2,F) be the new short-run equilibrium (after the decrease in autonomous consumption). Show and explain (using economic arguments) the impacts of the decrease in autonomous con- sumption on all spaces described in Figure 1. To explain the impacts, you may first describe what happens in the goods market, then in the money market and finally in the labor market. 0 0 ¡Ms sed Md conomy 181 M 0 0 W P 0 Z 0 0 T 0 W 0 П - Пе 0 xercise Y₁ IS Y₁ ZZ Y -LM Y WS --PS N PC Y Figure 1 shows a closed economy that is described by the following relations: Z = C(YT) + I(Y, r + x) + G Md PL(Y,r+ π²) W = P² F(u, z) P = (1 + m)W Y = N = with the following definitions in place: rin and u = 1- . The central bank targets the real policy rate F. (a) Which conditions need to hold in order for the economy to be in short-run equilibrium? Which conditions need to hold in order for the economy to be in medium-run equilibrium? If the economy is in short-run equilibrium, is it also in medium-run equilibrium? (b) Suppose that consumer confidence decreases, modeled as a decrease in auto- nomous consumption for simplicity. Let (Y,r) = (Y2,F) be the new short-run equilibrium (after the decrease in autonomous consumption). Show and explain (using economic arguments) the impacts of the decrease in autonomous con- sumption on all spaces described in Figure 1. To explain the impacts, you may first describe what happens in the goods market, then in the money market and finally in the labor market. 0 0 ¡Ms sed Md conomy 181 M 0 0 W P 0 Z 0 0 T 0 W 0 П - Пе 0 xercise Y₁ IS Y₁ ZZ Y -LM Y WS --PS N PC Y

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a For shortrun equilibrium the IS curve and LM curve must intersect This requires ZCYoverlineTIYrxov... View the full answer