Now suppose that stock market grows sharply. Finally, suppose that there are no policy interventions and the economy is left to adjust on it's own. 1200 Price Level 1100- 1000 900- 800- 700- 600 500 400* 300- 200- 100- 200 300 400 500 600 700 800 Real GDP As a result of this event, what is the new long-run price level? 100 900 1000 1100 120

Attached: figure 1: Hayek’s (Classical) AD-AS Model Question 1  Why does Hayek’s aggregate supply curve always lead to an equilibrium level of national output equal to the full-employment level of real GDP? Question 2  Hayek says that markets will heal themselves and that government should not intervene. How does the AD-AS model reflect Hayek’s idea that governments cannot increase real GDP beyond the level that the free market economy is able to produce? Question 3 Do you believe that the Hayek’s classical AD-AS model explain the factors that cause changes (shifts) in AS realistically? Why or why not?

Suppose that the government is concerned about keeping pace with this long-term growth and ensuring that it maintains a stable price level in its long-term equilibrium. Therefore, it does act and decides to keep increasing the autonomous demand for investment in order to try and maintain a constant price level in the face of this productivity growth. 3. Does the AD-AS model predict that this strategy could be effective? What would we expect to happen to both p* and the equilibrium interest rates in this example? Explain your answer.

Question: Consider the IS-LM model derived. Suppose the economy of Economica is initially at the general equilibrium. Suppose further that the government considers the increase of the effective tax rate on capital and hires you as a consultant. a. Explain and show graphically how an increase in the effective tax rate on capital would affect the labor, goods, or the asset market. b. Explain and show graphically how an increase in the effective tax rate on capital would affect the short-run equilibrium. c. Explain and show graphically how an increase in the effective tax rate on capital would affect the long-run equilibrium.

3. Graphically illustrate the Keynesian Model, show the equilibrium level of GDP (label it Ye) and the full employment level of GDP (label it Yf).

Q1: Consider the IS-LM model. Suppose the economy of Economica is initially at the general equilibrium. This year, the weather in Economica is extremely good.   a. Explain and show graphically how a good weather shock affects the labor, goods, or the asset market. b. Explain and show graphically how a good weather shock affects the short-run equilibrium. c. Explain and show graphically how a good weather shock affects the general (long-run) equilibrium.