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Appendix A Graphs for Q1.2 and Q2.3 Real Real Interest Interest Rate Rate r r I(r) I(r) I(r)' Savings/ Savings/ S S Investment Investment (a)

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Appendix A Graphs for Q1.2 and Q2.3 Real Real Interest Interest Rate Rate r r I(r) I(r) I(r)' Savings/ Savings/ S S Investment Investment (a) (b) Real Nominal t IS IS ' Interest IS IS Interest Rate Rate LM LM i=r GDP V VI GDPAppendix B Graphs for Q1.3 and Q2.4 Price Price level level Y P P P GDP GDP (a) (b) Price Price level level P P YA P P Y Y.' GDP GDPSECTION A The following economy applies to questions 1-3. Assume an economy in which the con- sumption (C) and investment (/) functions are given by C = 100 + 0.5 . (Y - T) / = 500 - 1000 . r where Y is real output and r is the real interest rate. Government purchases and taxes are G = 500, 7 = 100. The LM (money market equilibrium) curve is M P 5i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is ,* = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level () = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to * = 0.05.numwu {2021} Page 3 Qu-tion 2 Shortrun equilibrium output is initially at the longrun level (Y = 2000), and prices at the initial beforeshock level you solved for above. [18 marks] 1. Explain how the shortrun values of (r, 1') are determined before the vaccine news shock. 2. Which, if any, of the graphs from Appendix C best depicts the change in the Keynesian cross due to the vaccine news shock? Explain. 3. Which, if any, of the graphs from Appendix A best depicts the shortrun change in the interest rate{s) due to the vaccine news shock? Explain. 4. Which, if any, of the graphs from Appendix B best depicts the shortrun change in output and price due to the vaccine news shock? Explain. 5. What are the effects of the shock on the short-run equilibrium values of output Y, consumption 0, investment I, real interest rate r and price P? Do not give any numerical answers, just ll in the following table with +, or 0 to indicate whether each variable increases (+), decreases (}, or doesn't change (0}. There are 6 blanks to ll. YCIriP change

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