Homework3_asnwer

Homework3_asnwer - Econ 352 Intermediate Economics YiLi...

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Econ 352 YiLi Chien Intermediate Economics Spring 2011 Homework Assignment 3 Answer Question 1 (30 pts): The advent of interest-earning checking accounts in the early 1980s led many households to keep a larger proportion of their income in checking accounts. Suppose prices are sticky in the short run, but fully flexible in the long run (Keynesian model). Assume that the economy is initially in the long-run equilibrium. a. (15 pts) Use the aggregate demand – aggregate supply model to illustrate graphically the impact in the short run and the long run of this change in checking account. (Be sure to label the axes, the curves, the initial equilibrium values, the direction the curves shift, the short-run equilibrium values, and the long-run equilibrium values) State in words what happens to prices and output in the short run and the long run. A SRAS1 C AD1 SRAS2 Suppose the equilibrium is initially at point A . Having a higher balance in checking account implies the velocity of money drops. This shifts short run aggregate demand curve to the left (From AD1 to AD2 ). In the short run, the economy equilibrium moves from point A to point B . So the output falls and price unchanged in the short run. In the long run, the price gradually falls to P1 and output eventually goes back to the long run output level (Y1), equilibrium point C .
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Homework3_asnwer - Econ 352 Intermediate Economics YiLi...

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