Economics test.
r
P
Y
Y
LM
IS
r*
P*=Pe*
Y*=Yn*
SRAS
LRAS
AD
Y*
Initial Equilibrium
r
P
Y
Y
LM
IS
r*
P*=Pe*
Y*=Yn* = YL
SRAS
LRAS
AD
Y* = YL
Problem 1:
C0 Falls, IS Left
Short run: Unemployment up
Prices down
Long run:
Unemployment unchanged
Prices down (more)
IS2
AD2
PS
LMS
rS
YS
LML
rL
YS
SRASL
PL =Pe-L
r
P
Y
Y
LM = LML
IS
r* = rL
P*=Pe*
Y*=Yn*=YL
SRAS
LRAS
AD
LM2
AD2
rs
Ps
Ys
SRASL
LMS
Y*=YL
rL
PL =Pe-L
Ys
Problem 2:
Increase money supply:
Buy bonds
Lower discount rate
Lower reserve requirements
Quantitative easing (buy long-term assets)
Lower interest rate paid on reserves
Problem 3:
MS up, LM shifts right
Short run: Unemployment down
Prices up
Long run:
Unemployment unchanged
Prices up (more)
r
P
Y
Y
LM
IS
r*
P*=Pe*
Y*=Yn*
SRAS
LRAS
AD = ADreact
Y*
Problem 4
C0 Falls, MS rises
Move AD back where it started
r lower, but P and Y unchanged
No change from short run to long run
IS2
AD2
rS =
LMreact
rL
r
P
Y
Y
LM
IS
r*
P*=Pe*
Y*=Yn*
SRAS
LRAS
AD
Y*
LRAS2
SRAS2
Ps
rs
Ys
LMS
Ys
SRASL
LML
rL
PL =Pe-L
YL=YnL
YL
Problem 5:
Increase technology: LRAS right
Short run: r down, Y up, P down C up, I up, Un down
Pe unchanged
Long run:
r down, Y up, P down C up, I up, Un down
Pe down
Everything looks good…
But can we do better?
r
P
Y
Y
LM
IS
r*
P*=Pe*=Ps=PL
Y*=Yn*
SRAS
LRAS
AD
Y*
LRAS2
SRAS2
rs
LMReact
=rL
YS=YnL=YL
YS=YL
AD2
Problem 6:
Increase money supply:
Buy bonds
Lower discount rate
Lower reserve requirements
Quantitative easing (buy long-term assets)
Lower interest rate paid on reserves
Problem 7:
Increase technology + MS
Jump to better long-run outcomes!
Short run: r down, Y up, P unchanged C up, I up, Un down
Pe unchanged
Long run:
Prices equal expected prices, so short-run equals long-run