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In: Economics

.Suppose the economy is in long-run equilibrium, with real GDP at $19 trillion and the unemployment...

.Suppose the economy is in long-run equilibrium, with real GDP at $19 trillion and the unemployment rate at 5%. Now assume that the central bank unexpectedly decreases the money supply by 6%.

Suppose the economy is in long-run equilibrium, with real GDP at $19 trillion and the unemployment rate at 5%. Now assume that the central bank unexpectedly decreases the money supply by 6%.

a. Illustrate the short-run effects on the macroeconomy by using the aggregate demand / aggregate supply model. a. In which direction will GDP change?

b. In which direction will the price level move?

c. In which direction will unemployment move?

b. Illustrate the long-run effects on the macroeconomy by using the aggregate demand / aggregate supply model. a. In which direction will GDP change?

b. In which direction will the price level move?

c. In which direction will unemployment move?

c. Now assume this monetary contraction was completely expected. Illustrate both short-run and long-run effects on the macroeconomy by using the aggregate demand / aggregate supply model. a. In which direction will GDP change?

b. In which direction will the price level move?

c. In which direction will unemployment move?

Solutions

Expert Solution

Rahul Sunny answered 2 years ago
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