Assume a stock market bubble has just burst in the U.S., reducing consumer wealth: Graphically illustrate...

Assume a stock market bubble has just burst in the U.S., reducing consumer wealth:

Graphically illustrate the effects in the: (18 points)

Long-run model with an open economy

IS-LM and AD-AS model with an open economy using classical Real Business Cycle assumptions, distinguish short-run vs. long-run adjustments where appropriate

IS-LM and AD-AS model with an open economy using Keynesian assumptions, distinguish short-run vs. long-run adjustments where appropriate

For all three, do you get the same final long-run results? Explain. Your answer should consider effects on output, employment, unemployment, interest rates, price level, and real wages. (12 points)

NOTE: As you work through your analysis in each case, if there is ambiguity or uncertainty about the effect, it is most important that you: 1. Identify the ambiguity (i.e. interest rate could rise or fall, depending on which decreases more, savings or investment), 2. Make a decision (interest rate will rise), 3. Justify your decision (because savings changes by the full increase in government spending but investment depends on the effect of the change in the MPK)

Solutions

Expert Solution

Rahul Sunny answered 2 years ago

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