According to the Keynesian IS-LM model, what is the effect of each of the following on output, the real interest rate, employment, and the price level? Distinguish between the short run and the long run.(a)Expected inflation rises.(b)Wealth increases.(c)Labor supply decreases due to a change in demographics.(d)The future marginal product of capital decreases.
What will be an ideal response?
| (a) | Short run: Y and N increase; r falls; P is unchanged. Long run: P rises; Y, r, and N are |
| (b) | Short run: Y, r, and N increase; P is unchanged. Long run: r and P rise; Y and N are unchanged. |
| (c) | Nothing happens to any of the variables. |
| (d) | Short run: Y, r, and N fall; P is unchanged. Long run: r and P fall; Y and N are unchanged. |
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