Question

I only need part B, part A is for reference.

A) Assume the economy is at full employment. Use the IS-LM/ AD-AS model to show the short-run and long-run impacts of a positive demand shock such as an increase in business confidence and investment spending on: the real interest rate (r), real GDP (Y), unemployment (U), consumption spending (C), the nominal money supply (M), the price level (P) and the real value of the money supply(M/P). You must present properly labeled (IS-LM and AD-AS diagrams to show the SR and LR effects. Initial equilibrium points should be labeled “A”; short-run equilibrium points should be labeled “B”; and the LR should be labeled “C”. Also, present individual time graphs such as the graphs I use in class to show the impacts on EACH of these variables over time. Again use the “A”, “B”, “C” convention

B)Suppose that the central bank decides to respond in the short run to the impact of the increase in business confidence shown at point “B”. In particular, suppose that the central bank wants to prevent the economy from overheating and increasing inflation. a. What should the central bank do? Show the impact of the central bank’s action, using the ISLM/AD-AS model. Label the impact as point “D”. b. How to (r), (Y), (U), (C), (M), (P) and (M/P) at point “D” compare to point “C” shown in Question 1. Present individual time graphs such as the graphs I use in class to show the impacts on EACH of these variables over time moving from points “A” to “B” and finally to “D”.

Answer 1