An economy experiences a Fiscal contraction recession, with its G decreasing from 8 to 7. The key macroeconomic variables respond as follows: = C I r M P Em Before 37 23 9 7% 101 40 0 After 37 23 10 6% 101 ? 0.01 +The money demand is M/P = (r-v/5000)2 (b) Find the effect of fiscal contraction on (c) Graph the before and after of the money inflation (price level, in terms of our model). market. Label axes and curves, map Comment on your intuition for why that equilibrium values. happened. (d) Did you shift the demand for real money in (c)? Why or why not? Looking at the factors that affect the demand and the coordinates we graph the money market in, what has to happen in order for the money demand to increase (shift right)? Answer Key : b) 28 )101/40 and 7 % to 101/28 and 65 % why? |