Assume That the Economy Is Initially in a Short-Run Equilibrium

question 85

Essay

Assume that the economy is initially in a short-run equilibrium at a level of output below the natural rate.
a.Use the IS-LM model to graphically illustrate (1) how the economy will adjust in the long-run if the no policy action is taken and (2) the long-run equilibrium if fiscal policy is used to return the economy to the natural rate of output.
b.Explain how investment, the interest rate, and the price level differ in the new long-run equilibrium in the two cases.

---

Definitions:

Naturalistic Observation

The observation of behavior in a real-world setting.

Foreign Students

Individuals who travel to another country for the purpose of pursuing education that is not available in their home country.

College Life

The experience of attending a college or university, encompassing academic responsibilities, social activities, and personal growth opportunities.

Confidential

Pertains to information that is meant to be kept secret or private between individuals or parties.