Question

In: Economics

Suppose in a closed economy, the price is fixed and firms produce as much as demanded...

Suppose in a closed economy, the price is fixed and firms produce as much as demanded in the short run. The economy is originally in a general equilibrium. Now consider the case if its central bank tightens money supply (here tightening means reducing).

Please simply answer what happen to consumption (C) and national saving (S) in the short -run equilibrium, and what happen to P in the long run equilibrium.

Solutions

Expert Solution

As the money supply is tightened the consumer spending will contract and hence the consumption will be lower as for National saving since it is a function of gdp-consumption-government purchase for closed economy and as consumption will contract National Saving will increase.

Price in the long run will come down since the consumption is lower and which will in effect cause the price to decrease.

Rahul Sunny answered 2 years ago
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