Assume the price level is fixed in the short run so that the economy does not re

Question

Assume the price level is fixed in the short run so that the economy does not reach a general equilibrium immediately after a change in the economy. For each of the following changes what are the short-run effects on the real interest rate and output? Assume in the short run, firms are willing to produce enough output to meet the aggregate demand for output.
4.a) An increase in the expected inflation rate.
4.b) A temporary increase in government purchases.
4.c) An increase in nominal money supply.
4.d) An increase in lump-sum taxes with no change in government purchases (consider both the case in which Ricardian equivalence holds and the case in which it doesn

Explanation / Answer

Er, first: obligatory lol at the first person who tried to answer this.

Assume the price level is fixed in the short run so that the economy does not reach a general equilibrium immediately after a change in the economy. For each of the following changes what are the short-run effects on the real interest rate and output? Assume in the short run, firms are willing to produce enough output to meet the aggregate demand for output.

So we want to know the SHORT-RUN EFFECTS on the REAL INTEREST RATE and OUTPUT

4.a) An increase in the expected inflation rate.

Real interest rate: No change

Output: Decrease

4.b) A temporary increase in government purchases.

Real interest rate: Decrease

Output: Increase

4.c) An increase in nominal money supply.

Real interest rate: Increase

Output: Decrease

4.d) An increase in lump-sum taxes with no change in government purchases (consider both the case in which Ricardian equivalence holds and the case in which it doesn’t).

Ricardian holds:

Real interest rate: No change
Output: Decrease

Ricardian doesn't hold:

Real interest rate: Increase

Output: Decrease

I hope that you found this answer useful towards your studies. It took a considerable amount of thought, time, and effort to compose, and and I'd sincerely appreciate a lifesaver rating! It would really make my day! :)

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.