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Using the IS-LM and Aggregate Supply-Aggregate Demand (AS-AD) models of Chapter 12 with a flat short-run...


Using the IS-LM and Aggregate Supply-Aggregate Demand (AS-AD) models of Chapter 12 with a flat short-run AS curve (that is, c
FIGURE 12-8 Interest rate, i Expected Deflation in the IS-LM Model An expected deflation (a negative value of ET) raises the
Using the IS-LM and Aggregate Supply-Aggregate Demand (AS-AD) models of Chapter 12 with a flat short-run AS curve (that is, completely sticky prices), suppose the economy is at the natural rate of unemployment and so, at long-run equilibrium. Suddenly, taxes are reduced with no change in government spending. Tell me (or show on a graph) what happens to the IS and/or LM curves. Show on a different graph what happens on the AS-AD diagram in the short-run (drawing in the long and short-run aggregate supply curves and the aggregate demand curve, and shifting one or more curves). Due to what happened above there will either be a shortage or surplus of labor and goods, so prices will either fall or rise as we move to the long run. Tell me (or show in a graph), what happens to the IS and/or LM curves as prices change and we move to the long-run. Explain why the curve(s) shifted as they did.
FIGURE 12-8 Interest rate, i Expected Deflation in the IS-LM Model An expected deflation (a negative value of ET) raises the real interest rate for any given nominal interest rate, and this depresses investment spending. The reduction in investment shifts the IS curve downward. Income falls from Y, to Y. The nominal interest rate falls from i, to iz, and the real interest rate rises from r, to r2. IS, Y Y ,Income, output, Y
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we know that, initially economy is at its long mun equilibulum i-e. producing natural output. Reducing taxes, with no changeina LM, (M/2) izl.- LMO(9) » фир Yny ds puices incuease due to labou shoutage beyond yn Meal money supply falls Given nominal

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