Question

Suppose the economy is initially at the medium-run equilibrium. Suppose because of less competition the mark-up goes up. Please answer the following questions to go through the impacts of this on macro-economy both in the short run and medium run:

(1) Draw the AS-AD graph. Mark the original equilibrium position before this monetary policy. Explain the shift of either the AS or AD curve and describe carefully how the economy adjusts from the short-run equilibrium to the medium-run equilibrium.

(2) In the new medium-run equilibrium, will the interest rate increase or decrease or go back to its previous level before the monetary policy? What about the investment level? Explain using either AS-AD or IS-LM framework or both.

Answer 1

a)Here by i am attaching the graph that depicts the changes in the equilibirium when moving from short run to medium run

here before any monetary policy change the equilibirium point was point A here both the  supply and demand is equal and p is the price level and q is the quantity level which means output . After the policy change the equlibirium moved  from short run equilibirium to medium run equilibirium so there is a chnage in as curve the as curve shifts towards left which means there is enough demand but there face a shortage of supply which means supply is less and demand is more so the price of the product increases and quantity output decreases so we get a new equilibrium that is point B

b)Investment level increases because they face the shortage in supply of goods and the demand is the same level so they increase the investment level to increase the supply of goods and intrest level will be the same there will not be any change the intrest level