Question: please answer in detail This question comes from the AS-AD model developed in AS. AD.pdf and will ask you to demonstrate the impact of an
This question comes from the AS-AD model developed in AS. AD.pdf and will ask you to demonstrate the impact of an increase in government spending G. Suppose the economy is initially in medium run equilibrium. (a) (Spts) Using a diagram of the IS-LM and AS-AD models, demonstrate the impact this policy change has on the macroeconomy in the short run. Be sure to note the new short run equilibrium values of Y, i, and P. You do NOT need to start with a diagram of the goods market if you can correctly shift the IS and LM curves. (b) (8pts) Advance your model 1 period and allow workers' expectations of the price level to adjust in the direction they were wrong). Show how the labor market adjusts to these new expectations and any corresponding shifts in the AS-AD model. (c) (8pts) Finally, in a diagram of the labor market and AS-AD model, show the return of the economy to the medium run, letting pe" = P". You can use the same graph as part (b) if you wish to (a) (6pts) Was the policy neutral in the short run? What about the medium run? Explain
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