Suppose that the price level is fixed in the short run so that the economy does not reach general equilibrium immediately after a change in the economy. For each of the following changes, what are the short-run effects on the real interest rate and output? Assume that when the economy is in disequilibrium, only the labour market is out of equilibrium; assume also that for a short period firms are willing to produce enough output to meet the aggregate demand for output.
a. A decrease in the expected rate of inflation.
b. An increase in consumer optimism that, increases desired consumption at each level of income and the real interest rate.
c. An increase in government purchases.
d. An increase in lump-sum taxes, with no change in government purchases (consider both the case in which Ricardian equivalence holds and the case in which it does not).
e. A scientific breakthrough increases the expected future MPK.