Suppose the economy is initially in a long-run equilibrium. Starting from this position, assume that an exogenous shock such as the Covid 19 pandemic pushes the economy away from the equilibrium. If the government chooses not to intervene in the economy, what will happen to the above variables in the long run? Please indicate in the space below what will happen in the transition from the short run back to the long run equilibrium and the final values of output and unemployment in the long run. Short-run Output __________________ Unemployment ___________________ Prices __________________ Interest rate __________________ Real Money Bal __________________ 2. What would be the advantage or benefit if the government intervenes in the economy as suggested in B.2 above? On the other hand, what would be a possible benefit if the government does not intervene and instead relies on the economy’s self-correcting mechanism?
Please write on the space provided what happens to each variable -- indicate whether each variable increases, decreases, or remains unchanged. Please show in the graphs the initial equilibrium, short run equilibrium, and final long run equilibrium. If possible, please provide only two graphs, one for IS-LM and one for AD-AS that show all of the equilibrium positions
Suppose the economy is initially in a long-run equilibrium. Starting from this position, assume that an exogenous shock such as the Covid 19 pandemic pushes the economy away from the equilibrium.
- If the government chooses not to intervene in the economy, what will happen to the above variables in the long run? Please indicate in the space below what will happen in the transition from the short run back to the long run equilibrium and the final values of output and
unemployment in the long run.
Short-run
Output __________________
Unemployment ___________________
Prices __________________
Interest rate __________________
Real Money Bal __________________
2. What would be the advantage or benefit if the government intervenes in the economy as suggested in B.2 above? On the other hand, what would be a possible benefit if the government does not intervene and instead relies on the economy’s self-correcting mechanism?
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