Question

Evaluate the effect of each shock below using first the classical model and second the Keynesian model. For the Classical model, include graphs of the goods market, the labor market, and the money market. For the Keynesian model, include an IS-LM-FE graph, an Aggregate Supply – Aggregate Demand graph, and a graph of labor market equilibrium with efficiency wages. For the Keynesian model, include short-run effects, while the price is constant, and long run effects after the price has fully adjusted.

1. There is a permanent increase in the money supply.
2. There is an increase in expected future productivity (the z in the production function).
3. There is an increase in government spending financed by an increase in expected future taxes.
4. There is an increase in the price of oil which reduces total factor productivity (z).

Answer 1