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:

Net Present Value

A method of evaluating the profitability of an investment by calculating the difference between the present value of cash inflows and the present value of cash outflows over the investment's lifetime.

Variable Cost

Costs that vary in proportion to the volume of output or activity, such as materials and labor.

Monthly Interest Rate

The percentage of interest charged or earned on a loan or investment over a month.

Invoice Date

The date on which an invoice is generated, marking the beginning of the payment terms period.