Question

suppose that the price level is xed in the short run so that the economy doesn't reach general equilibrium immediately after a change in the economy. for each of the following changes, what are the short-run eects on the real interest rate and output? assume that, when the economy is in disequilibrium, only the labor market is out of equilibrium; assume also that for a short period rms are willing to produce enough output to meet the aggregate demand for output. (a) a decrease in the expected rate of ination. (b) an increase in consumer optimism that increases desired consumption at each level of income and the real interest rate. (c) a temporary increase in government purchases. (d) an increase in lump-sum taxes, with no change in government purchases (consider both the case in which ricardian equivalence holds and the case in which it doesn't). (e) a scientic breakthrough that increases the expected future mpk.

Answer 1

In the short run, changes in the expected rate of inflation, consumer optimism, government purchases, lump-sum taxes, and a scientific breakthrough can have varying effects on output and the real interest rate.

Step-by-step explanation:

In the short run, changes in aggregate demand can have a short-run impact on output and the real interest rate. Let's consider the following changes:

1. A decrease in the expected rate of inflation: This would lead to a decrease in the real interest rate and an increase in output. A decrease in expected inflation would lower the nominal interest rate, making borrowing less expensive and stimulating investment and consumption.
2. An increase in consumer optimism: This would increase desired consumption at each level of income and the real interest rate. The increase in desired consumption would lead to an increase in aggregate demand, pushing up the real interest rate and output.
3. A temporary increase in government purchases: This would increase aggregate demand, leading to an increase in both the real interest rate and output.
4. An increase in lump-sum taxes: The short-run effects of this change depend on whether Ricardian equivalence holds. If Ricardian equivalence holds, it means that individuals anticipate future tax increases to finance the current tax cut and adjust their saving accordingly. In this case, there would be no short-run effects on the real interest rate and output. If Ricardian equivalence doesn't hold, an increase in lump-sum taxes would reduce aggregate demand, leading to a decrease in both the real interest rate and output.
5. A scientific breakthrough that increases the expected future MPK: This would increase the expected future return on capital, leading to an increase in investment, output, and the real interest rate.