1) For the following cases please explain what happens in the US to the short ru

Question

1) For the following cases please explain what happens in the US to the short run output (i.e. short run fluctuation), real interest rate and inflation using (all of the following): - The equations for the IS, MP and Phillip’s’ curve. - The appropriate graphs. - Economic intuition (written explanation). Explain both cases: when the Federal Reserve doesn´t do anything and when it decides to fully stabilize the economy:

a. There is a big recession in china and, at the same time, the (US) government reduces the income tax. Assume that the effect of the income tax over the economy is higher than the effect of the Chinese recession.

b. The sensitivity of investment with respect to the interest rate increases and, at the same time, the exogenous eagerness to invest (i.e. the fixed long run share of the potential GDP that is invested) decreases. Assume that the sensitivity has more effect over the economy than the exogenous eagerness. - For the following case you don´t need to work on both cases, where the FED acts and doesn´t act; because there is only one possible analysis for this question (you still must use the equations, graphs and verbal explanations).

c. Assume that the investment doesn´t react, at all, to the gap between the real interest rate and the marginal productivity of capital. It turns out that people are starting to value more the foreign coffee. There is also an increase in the desire of going to the movies along the teenage population in the US. Assume that the effect of the later is higher than the effect of the former.

Explanation / Answer

Ans a There is a big recessiion in china and US government reduce it .

B. The investment is sensitive in nature.

C Effect of later is higher than the effect of the former.

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