Draw what happens in the economy in the short run when interest rates fall.

a. What components of GDP change—how and why?

b. How does aggregate demand and/or supply change? What type of gap is the economy in?

c. What is the impact on price, real GDP and unemployment?

Solutions

Expert Solution

a) When the interest rate falls in the market the the investment in the market increase.

The consumption and investment in the GDP will change, as people will be consuming more and at a lower interest rate the investment in the market will increase.

b) The aggregate demand will shift to the right and the new equilibrium will be at a higher price and higher output. this will cause an inflationary gap in the market.

c) the price in the market will rise and real GDP will rise with it. unemployment will fall as the output has increased.

Rahul Sunny answered 1 year ago

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