Suppose the Fed’s rule is given by: r = αY + γZ. (Show Work) (a) Draw...

Suppose the Fed’s rule is given by: r = αY + γZ. (Show Work)

(a) Draw the AD curve.

(b) Due to budget cuts, government expenditure decreases in a given year. What is its effect on equilibrium output and price level?

(c) How does the change in price affect investment levels? Explain the mechanism clearly.

(d) Does the price change affect the level of output?

Expert Solution

Rahul Sunny answered 2 years ago

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