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Suppose two countries exist that have the same values for all parameters in the AD-AS model except that in country one investment depends positively on output (Y) as well as negatively on the real interest rate. In country two investment depends negatively on the real interest rate but does not depend on Y. The sensitivity to the real interest rate of investment (d) is the same in both countries. Assume that both countries are initially at the same long-run equilibrium with respect to inflation and output.
a. Compare how a one-time permanent increase in the price of oil (e.g. oil rises from $50 to $100 and stays at $100) would affect both countries in period 1 and in the long run with respect to output, inflation, consumption, investment, net exports, and the real interest rate.
b. Compare how a permanent increase in government spending would affect both countries in period 1 and in the long run with respect to output, inflation, consumption, investment, net exports and the real interest rate?
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