Assume that the central bank has an inflation target and it follows an interest rate rule. The economy is operating at the medium run equilibrium. a) Draw a neat diagram showing the AS-AD curves at the medium-run equilibrium. Carefully label the curves, the axes, and the significant points on the axes (Y, , , Y etc.). b) Explain in words why the AS curve slopes upward, and why the AD curve slopes downwards. Now suppose new digital technologies developments (think of Google, Amazon, Netflix, etc) occur that lead to a permanent decrease in the degree of competition in the economy - that is, an aggregate increase in firms' markup "m" on marginal cost. c) What will be the short run impact of these developments on the economy? Use an AS-AD diagram to explain your answer.
Assume that the central bank has an inflation target and it follows an interest rate rule. The economy is operating at the medium run equilibrium.
a) Draw a neat diagram showing the AS-AD curves at the medium-run equilibrium. Carefully label the curves, the axes, and the significant points on the axes (Y, , , Y etc.).
b) Explain in words why the AS curve slopes upward, and why the AD curve slopes downwards.
Now suppose new digital technologies developments (think of Google, Amazon, Netflix, etc) occur that lead to a permanent decrease in the degree of competition in the economy - that is, an aggregate increase in firms' markup "m" on marginal cost.
c) What will be the short run impact of these developments on the economy? Use an AS-AD diagram to explain your answer.
(d) What will be the effect of these developments on the labour market in the medium run? Use a wage-setting and price-setting (WS-PS) diagram to explain what will happen to the natural rate of
Step by step
Solved in 3 steps with 2 images
