In: Economics
Indicate if the variable increases, decreases or does not change. Compare to the initial equilibrium. |
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Short run |
Long run |
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Real output |
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Real interest rate |
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Price level |
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Consumption |
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Investment |
All the above listed are fiscal measures to boost aggregare demand, hence the Ad curve will shift to the right
In short run, there is increase in output and an increase in interest rate as shown in ISLM curve. Real output and real interest rate rises in the short run as there is no sudden change in price levels. So, there is no inflation and hence no change in price level in short run
AS-AD:
Now, assuming that the economy started in the long run, we see that output is beyond full employment level. So, prices will strat increasing now, so that there is a shift along the new AD curve. AD':
So, we see that output retuns to initail level with a much higher increase in price. On the ISLM fornt, an increase in price means that the real money supply is falling, so the LM curve will move backwards. Also, an increase in interest rate means that there is some reduction in investment so IS curve shift to the left as well:
So we find that output has fallen back to original position, with an increase in nominal interest rates.
The following table summarises:
Short run | Long run | |
Real output | Increase | Does not change |
Real interest rate | Increase | Does not change |
Price level | Does not change | Increase |
Consumption | Increase | Increase |
Investment | falls | falls |