Assume the Economy Is Initially in a Short-Run Equilibrium at a Level

question 34

Essay

Assume the economy is initially in a short-run equilibrium at a level of output below the natural rate. a. Use the $I S - L M$ model to graphically illustrate: (1) how the economy will adjust in the longrun 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.

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Definitions:

Limbic System

A complex system of nerves and networks in the brain, involved with instinct and mood. It controls the basic emotions (fear, pleasure, anger) and drives (hunger, sex, dominance, care of offspring).

Frontal Lobes

The part of the brain located at the front of each cerebral hemisphere, responsible for higher cognitive functions, such as reasoning, planning, parts of speech, movement, emotions, and problem solving.

Intimacy

The sense of closeness and attachment resulting from a deep understanding and mutual affection between individuals, often developed through sharing personal thoughts, feelings, and experiences.

Emotionally Close Relationships

Bonds between individuals characterized by deep affection, trust, mutual support, and strong emotional connections.