The economy of Lower Slobovia is currently experiencing an interest rate of 12% and a real...

The economy of Lower Slobovia is currently experiencing an interest rate of 12% and a real GDP of 5,000. The level of aggregate demand puts in the Keynesian range of the country's aggregate supply curve and perfectly elastic range of the country's labor supply curve. Suppose the government has announced its intent to achieve a target interest rates of 6% and a real GDP level of $10,000. Further assume this action still leave the economy in the perfectly elastic ranges of its aggregate supply and labor market curves.

A. Identify the specific macroeconomic policy action you wold recommend the government to take to achieve these twin targets.

B. What impact will the change in the general economy have on the market equilibrium for wheat in Lower Slobovia?

C. What impact would you expect the macroeconomic policy you recommended in part a on an individual wheat producer's average profit? Total Profit?

Solutions

Expert Solution

Since government wants to lower the interest rate, thus it would obviously go for cheap monetary and fiscal policies. Government, through its central bank will indeed give rise to money supply. Money supply shall give push to economic activities by the lowering down interest rate.

Further, Government can go for expansionary fiscal policy where it will increase

Equilibrium quantity of wheat would witness rise due to spike in aggregate demand.

Rise in aggregate demand will pull the quantity and price as well. Thus profits are likely to rise.

Rahul Sunny answered 1 year ago

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