Question

Assume that all prices are perfectly flexible and there is complete information. Use an AD/AS diagram...

Assume that all prices are perfectly flexible and there is complete information. Use an AD/AS diagram to model the goods market, a labor demand/supply diagram to model the labor market, and the loanable funds diagram to model the financial market. Assume that in addition to the real interest, consumption depends on current disposable income and the present value of future disposable income. Speculate what would happen in the current time period to equilibrium output, prices, real interest rates, savings (and consumption) and investment expenditures, real wages and employment as a result of:

a. A decrease in the money supply.

b. Government spending increases as a result of an increase in military expenditures. Assume that government budget remains balanced.

c. A permanent change in technology that results in greater output for the same amount of inputs and that increases the marginal products of labor and capital.

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