Question

Using the RBC Model, suppose that due to increased drug addiction in the United States, consumer’s preferences shift toward more leisure and less consumption goods. Using the intertemporal model, what are the impacts on the following (please show the reason detailly)

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

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

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

Answer 1

1.Money supply will decreases. Due to drug addiction in the United consumer preferences towards more leisure and less consumption goods. Under this consumer demand for consumption and good and services are lower. It will reduce the aggregate demand for good and services. It creates surplus in goods in market. As a result fall in aggregate demand, firm will reduce their investment and production. They will produce less output and low profit due to lower production level in current period

Lower investment discourage firms to borow moneu from banks. It will reduce moneu supply in economy

2. Demand for money will increase. Because as they prefer less consumption goods, they reduces their consumption. They will keep money in hand to meet to unforeseen expenses in future

C. As aggregate demand fir good and services falls, price level will also falls . It will reduce output and profit of frms