Topic 5. Short-run AS – AD model Consider the AS-AD model presented in L10. Consider an economy without international tr

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Topic 5 Short Run As Ad Model Consider The As Ad Model Presented In L10 Consider An Economy Without International Tr 1 (334.13 KiB) Viewed 14 times

Topic 5. Short-run AS – AD model Consider the AS-AD model presented in L10. Consider an economy without international trade. Suppose there is an unexpected volcano explosion that destroys productive capital, so that the marginal product of capital increases at full capacity, and potential output falls. a) What would happen to current GDP in the short-run, assuming all other parameters remain the same, that is, ceteris paribus? (hint: consider the short-run IS curve) b) To help the economy, central bank decide to engage in expansionary policy by raising target inflation rate? What would happen to the AS and AD curves? c) To rebuild the loss productive facilities, the government decides to increase spending. What happens to the AS and AD curves?