Use the classical (RBC) IS—LM—FE model to show the effects on the economy of a temporary adverse supply shock; for example, an increase in the price of oil
You should show the impact on the real wage, employment, output, the real interest rate, consumption, investment, and the price level.
The lower TFP reduces the marginal product of labor, thus shifting the labor—demand curve to the left, reducing the real wage and employment. The adverse supply shock thus shifts the FE line to the left because both TFP and employment decline. To restore equilibrium, the price level rises, shifting the LM curve left. The result is lower output and a higher real interest rate. The higher real interest rate reduces investment. The lower income and higher real interest rate reduce consumption.
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Assume the economy is initially in equilibrium with real GDP equal to potential GDP. Other things equal, if the economy enters a recession, automatic stabilizers
A) reduce the magnitude of the multiplier and reduce the size of the decline in real GDP. B) reduce the decline in investment expenditures and therefore increase the real short-term interest rate. C) cause any decrease in real GDP to be offset by an equal decrease in the inflation rate. D) raise the interest rate to prevent the output gap from falling below equilibrium.
In the value-added approach, GDP is the sum of revenue received by all firms in the economy
a. True b. False
If personal income exceeds national income in a particular year, we can conclude that:
A. transfer payments exceeded the sum of Social Security contributions, corporate income taxes, and taxes on production and imports. B. the sum of Social Security contributions, corporate income taxes, and undistributed corporate profits exceeded transfer payments. C. consumption of fixed capital and taxes on production and imports exceeded personal taxes. D. transfer payments exceeded the sum of Social Security contributions, corporate income taxes, and undistributed corporate profits.
All of the following are true about a monopolist EXCEPT
A. the demand curve for its product is perfectly elastic. B. its demand curve is the same as the market demand for the industry. C. it produces a product with no close substitutes. D. it is a single seller of a good or service.