Suppose the Fed has just learned that some foreign economies are headed for recession, which will reduce U.S. exports. This is an economic shock that shifts the IS curve down
What would you do in response to the shock if you want to keep the economy at full-employment equilibrium under each of the following cases? (a) You use the classical (RBC) model. (b) You use the Keynesian (efficiency wage) model. (c) You use the extended classical model with misperceptions. In each case, show the IS—LM—FE diagram associated with your answer.
(a) Do nothing, let P adjust.
(b) Increase the money supply, shifting LM to the right.
(c) Do nothing if the IS shift was anticipated; could increase money supply if the IS shift was unanticipated and the money supply change would be unanticipated; or you could inform people about the IS shock, so they would build it into their expectations.
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Suppose Quarto takes 10 years to double the size of its economy. According to the rule of 70, its growth rate is _____
a. 15 percent b. 10 percent c. 7 percent d. 20 percent
A subsidy on a product will generate more actual benefit for producers (and less for consumers) when
a. the supply of the product is relatively inelastic. b. the supply of the product is relatively elastic. c. the demand for the product is relatively inelastic. d. either b or c is true