Consider a closed Keynesian economy. Draw an IS-LM diagram and mark the initial point as "0". Then: (A) Assume firms become more pessimistic about the future marginal product of capital. Graph the impact in the ISLM diagram (point “A") and explain the short run effects on Y, r, and P. (B) Explain how the economy will adjust in the longer run. Determine the long run effects on Y, r, and P. Mark the equilibrium as "B". (C) Suppose central bank responds to the disturbance in (A) in a way designed to keep output at its initial level. Explain what policy action the central bank must take. Mark the resulting equilibrium as “C". Organize your answers as shown below: ISLM diagram Table with directional answers: Direction of change |(up,down, unchanged, uncertain) Part (A) Part (B) Output Real interest rate Price level [If you entered "uncertain", explain here.] (A) Explain: (B) Explain: (C) Policy Action: (C) Explain:

Consider a closed Keynesian economy. Draw an IS-LM diagram and mark the initial point as "0". Then: (A) Assume firms become more pessimistic about the future marginal product of capital. Graph the impact in the ISLM diagram (point “A") and explain the short run effects on Y, r, and P. (B) Explain how the economy will adjust in the longer run. Determine the long run effects on Y, r, and P. Mark the equilibrium as "B". (C) Suppose central bank responds to the disturbance in (A) in a way designed to keep output at its initial level. Explain what policy action the central bank must take. Mark the resulting equilibrium as “C". Organize your answers as shown below: ISLM diagram Table with directional answers: Direction of change |(up,down, unchanged, uncertain) Part (A) Part (B) Output Real interest rate Price level [If you entered "uncertain", explain here.] (A) Explain: (B) Explain: (C) Policy Action: (C) Explain:

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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