11-2. Consider a country with an economic structure

11-2. Consider a country with an economic structure

11-2. Consider a country with an economic structure
consistent with the assumptions of the classical
model. Suppose that businesses in this nation
suddenly anticipate higher future profitability
from investments they undertake today. Explain
whether or how this could affect the following
(see page 232):
a. The current equilibrium interest rate
the demand for funds will rise so that interests will rise
this is in line will loanable funds theory where demand curve for funds shifts to right.
b. Current equilibrium real GDP
there is no effect as GDP in full employment level in long run. If we assume that economy was already in long run equilibrium then GDp will rise in short run only. The overheating caused will subside in long run and economy will get back to full employment level of GDP.
c. Current equilibrium employment
em`ployment is linked to GDP levels.
in short run as GDp rise employment will rise, and will return to ‘ full employment’ levels in long run.
we assume that in the start the economy was in long run equilibrium already
d. Current equilibrium saving
this is linked to consumption level which is affected by GDP.
assuming we start froma long run equilibrium position savings will rise temorarrtliy as GDp rise.
they will fall back to natural levels in long run
e. Future equilibrium real GDP (see Chapter 9)
there will be no effect on future long run GDp. it remains at natural / full employment levels unless there isa rise in productivity or amount of resources

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