2. Explain financial Friction (use equation to explain) ? What are the mechanics of lowering interest...

2. Explain financial Friction (use equation to explain) ? What are the mechanics of lowering interest rates?

3. Using AS/AD version of the short-run model, analyze the following macroeconomics event:

a- An inflation shock- Increase in price of oil

b- Disinflation- Reduce the Target Inflation

c- A positive aggregate demand shock – for example increase in demand for US goods.

Expert Solution

.financial friction is the rketdifference between the amount of return that business earn from capital,plant and mechinary —and the market cost of capital. it involve the amount that investors earn from holding financial claims , it can be meassures by taking the difference between the marginal product of capital adjusted for capital gains and losses on that capital and the short-term interest rate.The term ft is the value that equates the return to capital from the given formula to the one-year real interest rate. It is the spread between the return to capital and the safe real short rate:

ft = 1 qt α yt kt + (1 − δ)qt+1 − 1 − rt.

2 it explain the relationship between price level out put along with aggregate demand and agregate supply.It indicates the combinations of the price level and level of the output at which the goods and assets markets are simultaneously in equilibrium

a increase in the price of the oil increase the demand and reduces the supply

b increase the supply so reduction in demand

c increase the demand reduction in price , increase in demad reduces the supply , because of the uncontrollable demand

Rahul Sunny answered 2 years ago

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