Suppose That Initially U

question 86

Essay

Suppose that initially U.S. households are saving only a small fraction of their incomes because they are relying on rapid increase in stock prices to increase their wealth. If stock prices decline and households decide to increase their saving rate, what will be impact on output in the new Keynesian view? Be sure to distinguish the short run from the long run.

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Definitions:

Memory Strategy

Techniques used to enhance memory retention, recall, or the encoding of information.

Elaboration

The process of adding more details or expanding on an idea, theory, or concept to provide a deeper or clearer understanding.

Selective Attention

Deployment of attention to only a chosen subset of the information available for processing in a situation. Selective attention to information that must be remembered later can be used as a memorization strategy.

Working Memory

A cognitive system responsible for temporarily holding information available for processing tasks such as reasoning and comprehension.