Question

1. Assume that consumers in country suddenly decreased their expenditure. Show graphically the short run and long run impact of this decrease on the macroeconomic equilibrium point using AD and AS model (assume that the country's economy initially operates at the potential level of GDP and there is no government intervention). Briefly explain.
2. On December 13, 2017, the US Central Bank Chairman, Prof. Jeanette Yellen, announced an increase in the interest rate. Use the money market model to show graphically how the US central Bank could achieve this target. Make sure you show the old and new equilibrium interest rates. Briefly explain.

Answer 1

1. Assume that consumers in country suddenly decreased their expenditure. Show graphically the short run and long run impact of this decrease on the macroeconomic equilibrium point using AD and AS model (assume that the country's economy initially operates at the potential level of GDP and there is no government intervention). Briefly explain. (5 marks)
2. On December 13, 2017, the US Central Bank Chairman, Prof. Jeanette Yellen, announced an increase in the interest rate. Use the money market model to show graphicallyhow the US central Bank could achieve this target. Make sure you show the old and new equilibrium interest rates. Briefly explain. (5 marks)

1. Answer: as expenditure decrease than AD shift towards left which leads cause negative supply shock. Recessionary gap will generate. Price will fall and output also fall . But in the long run the economy is self correcting itself. Wages fall and price of resources will fall and aggregate supply shifted towards outward. Diagram is given below.

Question :2

Answer: less money supply leads to increase interest rate and Contractionary monetary policy which will decrease money supply and increase interest rate . Diagram is given below



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