Suppose the Fed Has Just Learned That Some Foreign Economies

question 42

Essay

Suppose the Fed has just learned that some foreign economies are headed for recession,which will reduce U.S.exports.This is an economic shock that shifts the IS curve down.What would you do in response to the shock if you want to keep the economy at full-employment equilibrium under each of the following cases?
(a)You use the classical (RBC)model.
(b)You use the Keynesian (efficiency wage)model.
(c)You use the extended classical model with misperceptions.
In each case,show the IS-LM-FE diagram associated with your answer.

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Definitions:

Thalidomide

A medication that caused birth defects when it was given to pregnant women during the 1950s and 1960s, notably used initially as a sedative and for morning sickness.

Pregnant Women

Refers to females who are in the state of carrying a developing embryo or fetus within the uterus.

Monozygotic Twins

Twins that are genetically identical because they were formed from a single fertilized egg that split into two, sharing 100% of their DNA.

Dizygotic Twins

Also known as fraternal twins, they develop from two separate eggs fertilized by two different sperm cells, resulting in genetically distinctive siblings.