PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Question
Chapter 13, Problem 1RQ
To determine
The key assumption of basic Keynesian model and its impact on short-run economic fluctuations.
Expert Solution & Answer
Explanation of Solution
The key assumption of the basic Keynesian model or the Keynesian cross is that ‘in the short run, firms meet the demand for their products at preset prices. This would mean that firms fixed a price for some period and meet the demand at the predetermined price rather to respond every change in the demand for their product. The fact is that firms do not change their prices frequently due to the menu cost. If the firms produce to meet the demand, then changes in demand dictates the level of output in the short run.
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Students have asked these similar questions
If a firm believes that their relative price has changed, then they will increase their output, since their
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Thirty percent of firms can adjust their prices ex-post. If a=1, and the current price level is $200,
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a=0.02 and Y rises by $2400.
(A Two-Period Sticky-Price Model). Consider a two-period, sticky-price economy like the one studied in lectures 11-13. Suppose that the household’s intertemporal optimality condition is of the form C2 C1 = β P1 P2 (1 + i), where C1 and C2 denote consumption in periods 1 and 2, P1 = P2 = 1 denote the price levels in periods 1 and 2, β = 0.9 denotes the subjective discount factor, and i denotes the nominal interest rate, which must satisfy the zero lower bound (ZLB). Suppose further that the full employment levels of output in periods 1 and 2 are given by Y¯ 1 = Y¯ 2 = 1, and that the economy is always at full employment in period 2 (the long run).
Part 1: Suppose the central bank sets the nominal interest rate at the level i ∗ that minimizes unemployment without overheating. Calculate i ∗ .
Part 2: Suppose that due to bad expected meteorological conditions, the full-employment level of output in period 2 is revised down to 0.8. Suppose that in response to this news, in period 1 the…
Your Policy Brief team has modelled the effects of an investment in Research & Development (R&D) that leads to the invention of a new production method which makes more efficient use of renewable energy sources. This new production method can be disseminated throughout the economy, bringing down production costs for businesses, and enabling the economy to make more productive use of existing resources. This brings an expansion in the economy’s productive capacity.
Illustrate the predicted effects of this innovation using an AD-AS diagram. Provide bullet points to explain what is happening in your diagram. As with all of your diagrams, be sure to indicate the original and new equilibrium points, and what happens to output and price level. To conclude your explanation, explain what the link between innovation and economic prosperity and wellbeing is.
Chapter 13 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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