S1 d) ( 4 points) Find the new price level associated with the long run general equilibrium. Please label these long run conditions to your four diagrams as point C . Be sure to label diagrams completely with the inclusion of all the relevant shift variables like we did numerous times in class. S1 e) ( 4 points) Let us focus on the movement from point A to B (the short -run) in your money market diagram. Explain why (and in what direction) the real interest rate had to change to 'clear' the money market. Be as specific as possible as we talked about this a great deal in class! S1 f) (5 points) What would the Fed have to do exactly in order to keep prices at their original level , consistent with their price stability objective? Assume the money multiplier is equal to 0.8, just like it is in the real world. 5
SCENARIO #2 – AN IS SHOCK! (A new Grader) Let’s return to our original conditions: Please write down the expressions for your ORIGINAL IS curve and LM curves in the space below (so the grader can follow your starting points). IS: r = ___________________________ LM: r = __________________________ Now draw four separate diagrams: (40 points total) Top left : a desired savings equals desired investment (S d = I d ), Top right : a FE - IS – LM diagram, Bottom left : a money market diagram, Bottom right : An AD - AS diagram, locating this initial equilibrium point as point A. BE SURE to LABEL all diagrams completely (10 points for each correctly drawn and labeled diagram…each diagram will have three different equilibriums points A, B, and C) 7
In this scenario #2, the investment function changes and is now: I d = 630 – 500r S2 a) (6 points) Name and support three reasons why the investment function would change like this. A list without support is worth half of the credit so support your answers!
- Spring '19
- Inflation, Bank of Japan