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Find the effects of each of the following on the general equilibrium values of the real...

Find the effects of each of the following on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the price level. Illustrate your answers with appropriate graphs (IS-LM-FE).

A) The expected rate of inflation decreases

B) The future marginal product of capital decreases. (Assume that there is no affect on current labor supply.)

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Expert Solution

Find the effects of each of the following on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the price level. Illustrate your answers with appropriate graphs (IS-LM-FE).

A) The expected rate of inflation decreases

B) The future marginal product of capital decreases. (Assume that there is no affect on current labor supply.)

Answer: if expected rate if inflation decrease than expansionary monetary policy would leads to increase in output, money supply, price of bond rises and rate of interest decrease. Due to decrease in rate of interest investment increases and aggregate demand increases ,this leads to decrease in reserve requirements,discount rate decreases and fed will buy bond in open market operation.Diagram is given below.

If future marginal products of capital decrease than output also decreases and IS curve shift leftward which leads to decrease in output and decrease in investment increases.

Hope answered your question thank you

Rahul Sunny answered 7 months ago
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