eco202 assignment 6 and self generated solutions.pdf

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Masoud Anjomshoa

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Assignment 61 Consider an economy that has been in equilibrium for a long time so its IS and LM curves are intersecting each other at potential output level YbarAlso suppose in this economy investment is ONLY a function of the interest rate not a function of income Y Just during the previous week the cartel of oil exporting countries OPEC has decided to cut the level of oil production which has led to a sharp increase in international price of oil and in turn domestic price of fuel electricity transportation and finally the overall price level Pa By drawing the IS and LM curves and potential output in a set ofiY coordinates show the before andafter shock short run equilibrium points and explain how and why Y C I and i change after the shockMake sure you write the reasons behind any change b Using the dynamics of movements of the ISLM curves why may we expect to see a sharp jump in interest rate right after the price shock followed by a partial recovery of the interest rate together with a recessionc While economy is still in the short run equilibrium after the shock government decides to bring the economy back to its potential outp
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