Question

Using the RBC Model, suppose that the value of equities (stock in companies) is included as...

Using the RBC Model, suppose that the value of equities (stock in companies) is included as a form of individual wealth that impacts the individual’s consumption / leisure decision. Suppose that equity prices are increasing. What are the implications on the following:

a) Output supply (increase / decrease / indeterminate / no change)?

b) Output demand (increase / decrease / indeterminate / no change)?

c) Output (increase / decrease / indeterminate / no change)?

d) Interest rates (increase / decrease / indeterminate / no change)?

e) Labor supply (increase / decrease / indeterminate / no change)?

f) Labor demand (increase / decrease / indeterminate / no change)?

g) Employment (increase / decrease / indeterminate / no change)?

h) Wages (increase / decrease / indeterminate / no change)?

i) Money supply (increase / decrease / indeterminate / no change)?

j) Money demand (increase / decrease / indeterminate / no change)?

k) Prices (increase / decrease / indeterminate / no change)?

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Answer #1

a) Output supply = increase

b) Output demand = increase

c) Output =no change

d) Interest rates = increase

e) Labor supply = increase

f) Labor demand =increase

g) Employment =increase

h) Wages = increase

i) Money supply = indeterminate

j) Money demand = increase

k) Prices = increase

Hence ,

Like all assets, share prices change as a result of shifts in supply and demand. ... Essentially, if more people want to buy a share than sell it, the price will rise because the share is more sought-after (the 'demand' outstrips the 'supply'). On the other hand, if supply is greater than demand, then the price will fall.

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