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Q4: IS-LM Short-Run Equilibrium Abel, Bernanke and Croushore, 10th edition, Chapter 9, Analytical Problems, No. 3. a Suppose that the price level is fixed in
Q4: IS-LM Short-Run Equilibrium Abel, Bernanke and Croushore, 10th edition, Chapter 9, Analytical Problems, No. 3. a Suppose that the price level is fixed 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 effects 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 firms are willing to produce enough output to meet the aggregate demand for output. (a) A decrease in the expected rate of inflation. (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 scientific breakthrough that increases the expected future MPK
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