Use the LR curve to show what happens to output, the real interest rate, and the price level in the short run and in the long run if the government provides a tax credit to people who buy a new home, which leads to an increase in new housing
investment.
The tax credit causes desired investment to rise, shifting the IS curve up and to the right. The short-run equilibrium occurs at a higher level of output and an unchanged real interest rate. In the long run, the equilibrium must occur at the intersection of the FE line and the IS curve, so the existing real interest rate is not tenable; the price level will increase, causing the LM curve to shift up and to the left, leading the LR curve to shift up. Compared with the initial situation, output is unchanged, the price level is higher, and the real interest rate is higher.
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Suppose the price level falls. Because of fixed nominal wage contracts, firms become less profitable and they cut back on production. This is a demonstration of the
A. classical dichotomy theory of the short-run aggregate-supply curve. B. sticky-wage theory of the short-run aggregate-supply curve. C. misperceptions theory of the short-run aggregate-supply curve. D. sticky-price theory of the short-run aggregate-supply curve.
This group consists of seven members appointed by the President of the United States for 14-year terms
A) the presidents of the Federal Reserve Banks. B) the members of the Federal Open Market Committee. C) the members of the Board of Governors of the Federal Reserve System. D) None of the above answers are correct.