Because of the ongoing pandemic, output has declined below its long-run equilibrium. The government is then...

Because of the ongoing pandemic, output has declined below its long-run equilibrium. The government is then interested in pushing output back to its original level. Using the Keynesian Cross and IS-LM, demonstrate how output and the real interest rate changes from the short-run to the long-run if the government implements policy that raises output back to its full-potential.

Solutions

Expert Solution

as economy falls short of potential output this implies that the economy is facing recession which means there is shortage of aggregate demand. the government can use expansionary monetary policy or fiscal policy to bring the economy back to the full employment level of output.

I have shown expansionary monetary policy.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Because of the ongoing pandemic, output has declined below its long-run equilibrium. The government is then...

Because of the ongoing pandemic, output has declined below its long-run equilibrium. The government is then interested in pushing output back to its original level. Demonstrate what happens Using the Keynesian Cross and IS-LM Model, demonstrate how output and the real interest rate changes from the Short-run to the Long-run if the government implements policy that raises output back to its full-potential. (posted earlier, but explanation was insufficient with SR and LR)

The economy is initially in its long-run equilibrium. The outbreak of the pandemic has increased the...

The economy is initially in its long-run equilibrium. The outbreak of the pandemic has increased the speed of autonomation and artificial intelligence (AI); as a result, the spending on autonomation and AI increases by 10%. a) According to the long-run classical model, what happens to the equilibrium levels of output, real interest rate, and investment? What happens to the real wage and the real rental price of capital? Explain your answer with the aid of THREE diagrams – one for...

An economy in its long-run equilibrium (i.e., output is at its natural level). Draw a graph...

An economy in its long-run equilibrium (i.e., output is at its natural level). Draw a graph of the AS curve in the short run and the AD curve and, in the graph, denote by A the pair ( Y,P) where the economy finds itself. The economy is now hit by a shock: the power of unions becomes temporarily very high so the cost of hiring workers increases substantially. (a) Is this a supply shock or a demand shock? Explain. (b)...

Suppose that the government of an economy that is in its long-run equilibrium gives out money...

Suppose that the government of an economy that is in its long-run equilibrium gives out money to most of the residents. Using the IS-LM and AS-AD model, describe both the short-run effects and the long-run effects of the following changes on national income, the interest rate, the price level, consumption, investment, and real money balances. Make sure to use both words and figures.

An economy is initially at its long-run equilibrium. In reducing the country's carbon footprint, the government...

An economy is initially at its long-run equilibrium. In reducing the country's carbon footprint, the government now spends a lot of money on tree plantation around urban areas. in the short run, the aggregate demand curve shifts right. In the long run the price level increases, output returns to its potential, and real wages do not change. In the short run, the aggregate demand curve shifts left. In the long run, the price level decreases, output returns to its potential,...

Consider the Canadian economy that is in long run equilibrium with output equal to Y*. The...

Consider the Canadian economy that is in long run equilibrium with output equal to Y*. The United States economy goes into a major slowdown causing a significant decrease in goods and services shipped into the United States from Canada. For the Canada, answer the following questions: A) What kind of shock occurred- aggregate demand or aggregate supply? Explain your answer. B) Explain the how fiscal policies by government of Canada can be used to drive the economy back towards Y*...

Long-run economic growth is generally positive rather than negative because long-run changes in output are driven...

Long-run economic growth is generally positive rather than negative because long-run changes in output are driven by changes in the: LRAS, including changes in consumption, investment and net exports. LRAS, including changes in labour, capital, and technology. aggregate demand, including changes in labour, capital, and technology. SRAS, including changes in labour, capital, and technology. When consumer confidence falls, in the short run: aggregate supply will shift to the left, reducing equilibrium GDP and price level; but in the long run,...

2. (a) “The short-run equilibrium of a perfectly competitive firm is similar to its long-run equilibrium”....

2. (a) “The short-run equilibrium of a perfectly competitive firm is similar to its long-run equilibrium”. Do you agree? Explain your answer (b) Monopolists have adverse effects on the consumer society and should be eliminated”. Discuss. (1200 words)

A decrease in government spending will, in the long-run, cause no change in A. output. B....

A decrease in government spending will, in the long-run, cause no change in A. output. B. the real interest rate. C. the price level. D. all of the above. E. both (a) and (b) of the above. Use the AD-AS framework and suppose the economy is in equilibrium at the full-employment level of output. If the Federal Reserve increases the money supply, the long-run final effect would be: A. an increase in output. B. a decrease in the real interest...

Subjects