Use the classical (RBC) IS—LM—FE model to show the effects on the economy of a temporary beneficial supply shock; for example, a decrease in the price of oil
You should show the impact on the real wage, employment, output, the real interest rate, consumption, investment, and the price level.
The marginal productivity of labor is increased, shifting the labor demand curve to the right. As a result, the real wage rises and employment increases. Both the higher productivity and increased employment increase output. The FE line shifts right, with the IS curve unchanged, so the LM curve must shift down (the price level declines) to restore equilibrium. As a result, the real interest rate declines, increasing consumption and investment.
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As Goldilocks consumes more gummy bears, her total utility ________ and her marginal utility from gummy bears ________
A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases
The neoclassical synthesis
A) was a name coined by Keynes himself for his new theories. B) rejected virtually all of Keynes' insights. C) held that econometric models of the economy could not be used to predict the future. D) held that economy always operated at or very near the natural rate of unemployment. E) was the dominant school of thought among economists in the 1950s and 1960s.