HW6 - Economics 2006, Fall 2007, Homework 6 Due in class,...

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Unformatted text preview: Economics 2006, Fall 2007, Homework 6 Due in class, Friday, November 9. Assume the economy starts at full employment and is hit by an autonomous (exogenous) shock. Initially the economy moves away from f Y , but in the long-run returns to f Y . The possibilities are indicated by the following graphs. R [1] R [2] IS f Y Y f Y Y R [3] R [4] IS IS f Y R f Y R Figure 1: A leftward shift in the IS curve. The economy is now on the new IS curve (as indicated by the dashed arrow), and in the short-run, the interest rate and output decrease. In the long-run, the economy moves down the new IS curve to f Y . Figure 2: A rightward shift in the IS curve. The economy is now on the new IS curve (as indicated by the dashed arrow). In the short-run, the interest rate and output increase. In the long-run, the economy moves up the new IS curve to f Y . Figure 3: No shift in the IS curve. In the short-run, economy moves down the IS curve (the dashed arrow), the interest rate decreases and output increases. In the long-run the economy moves up the IS curve and returns to f Y (the solid arrow)....
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HW6 - Economics 2006, Fall 2007, Homework 6 Due in class,...

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