Short run after the decline in business confidence

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Reference no: EM131104340

a. Suppose the economy begins with output equal to its natural level. Then, there is a reduction in income taxes. Using the AS–AD model developed in this chapter, show the effects of a reduction in income taxes on the position of the AD, AS, IS, and LM curves. b. Assume that the economy starts at the natural level of output. Now suppose there is a decline in business confidence, so that investment demand falls for any interest rate. In an AS–AD diagram, show what happens to output and the price level in the short run and the medium run. c. Suppose that the Federal Reserve decides to respond im-mediately to the decline in business confidence in the short run. In particular, suppose that the Fed wants to prevent the unemployment rate from changing in the short run after the decline in business confidence. What should the Fed do? Show how the Fed’s action, combined with the decline in business confidence, affects the AS–AD diagram in the short run and the medium run.

Reference no: EM131104340

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