A) Using the classical IS-LM, show how the economy will respond to a temporary decline in productivity. What happens to
Posted: Fri Jul 01, 2022 8:14 am
A) Using the classical IS-LM, show how the economy will respondto a temporary decline in productivity. What happens to the realinterest rate, the price level and output. (10pts)
B) Now assume that the Fed attempts to prevent a recession fromoccurring following the shock in part A by increasing the moneysupply. According to the classical theory, will the Fed's actionssuccessfully prevent a recession from occurring? Explain youranswer. (5pts)
B) Now assume that the Fed attempts to prevent a recession fromoccurring following the shock in part A by increasing the moneysupply. According to the classical theory, will the Fed's actionssuccessfully prevent a recession from occurring? Explain youranswer. (5pts)