Assume an economy is closed. According to classical economic theory, explain what will be the long-run effects of the increase in government purchases of the late 2000s. You need to present and discuss a formal model in detail for this question and then explain the implications of the model in the context of the question, i.e., explain the effects of expansionary fiscal policy in the model.
You may want to organize your answer around these three parts:
A) Aggregate Supply/Output (includes a discussion of the determinant of the level of output and the effect of fiscal policy on output in the long-run
B.Aggregate Demand/Real expenditures (includes a discussion of components of expenditures, their determinants, and the effect of fiscal policy on expenditures and the composition of expenditures).
C. Loanable Funds Markets (includes a discussion of the determinant of the interest rate in the loanable funds market and the effect of the fiscal policy on the real interest rate in the long run). Please include a graph if possible.
Assume an economy is closed. According to classical economic theory, explain what will be the long-run effects of the increase in government purchases of the late 2000s. You need to present and discuss a formal model in detail for this question and then explain the implications of the model in the context of the question, i.e., explain the effects of expansionary fiscal policy in the model.
You may want to organize your answer around these three parts:
A) Aggregate Supply/Output (includes a discussion of the determinant of the level of output and the effect of fiscal policy on output in the long-run
B.Aggregate Demand/Real expenditures (includes a discussion of components of expenditures, their determinants, and the effect of fiscal policy on expenditures and the composition of expenditures).
C. Loanable Funds Markets (includes a discussion of the determinant of the interest rate in the loanable funds market and the effect of the fiscal policy on the real interest rate in the long run). Please include a graph if possible.
