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Illustrate the initial equilibrium-dynamic adjustment

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Reference no: EM132422481

Problem: Suppose the economy is initially operating at Yn. Now suppose G increases.

Required:

Question 1: Use the graph below to illustrate the initial equilibrium, dynamic adjustment, and medium-run equilibrium. In your graph, illustrate the equilibrium for the next two periods (in addition to the medium-run equilibrium).

Question 2: What are the initial effects of the increase in G on P, M/P, i, I, and Y?

Question 3: What happens to u and Y relative to their natural levels during: the short run, the dynamic adjustment, and the medium run?

Question 4: When Y is greater than Yn, what happens to the AS curve for the next year? Explain.

Question 5: As the AS curve shifts, what happens to P, M/P, i, I, and Y?

Question 6: What are the medium-run effects of the increase in G on P, M/P, i, I, and Y?

Question 7: Does Y return to Yn? If so, what does this suggest about P and P e in the medium run?

Reference no: EM132422481

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