Question

Help please I am so confused

1. Assume that nominal wages are sticky and that firms determine the level of employment in the short run. Use an AD/AS diagram to model the goods market, a labor demand/supply diagram to model the labor market, and the loanable funds diagram to model the financial market. Assume that in addition to the real interest, consumption depends on current disposable income and the present value of future disposable income. Speculate what would happen in the current time period to equilibrium output, prices, real interest rates, savings and consumption) and investment expenditures, real wages and employment as a result of a. An increase in the money supply. b. Government spending increases as a result of an increase in military expenditures. Assume that government budget remains balanced. c. A permanent change in technology that results in greater output for the same amount of inputs and that increases the marginal products of labor and capital d. There was a temporary increase in the price of oil. Why does an increase in price of oil pose a dilemma for the monetary authority (Fed)?

Answer 1

In the graph below you can see that i have shown three markets i.e Goods Market, Labor market and loanable fund market . In goods market a is the initial equilibrium point where AS = AD and P is the price level and Q is the output level.

In the Labor market a is the equilibrium point where D_{L =} S_L at which W is the wage and Q_L is the amount of employment.

In the loanable fund market , a is the equilibrium where S_LF= D_LF at which r is the rate of interest and Q_LF is the amount of loanable fund.

Croods Market labor Markt Loanable fund Monket! Price level 1 W a wages e gate of interest a "DLF 0 6 a Real Goy complayment Quantity/ employed OLE Quantity of hoanable fend

a) See graph below , As money supply increases, In goods market this will shift the AD to the right which is AD1 and this will increase output(Q1) and price level(P1) in the economy you can see at point b where AS = AD1

In labor market , as wages are sticky this will shift supply curve to the right as there is increase in consumption so employment (Q_L1) will increase.

In the loanable fund market , money supply increase will shift the , supply of loanable fund to the right (S_LF1). This will reduce rate of interest and increase quantity of loanable fund.

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Croods Market labor Market RMTAK Loanable fund AS ok ISLF Price level sate of interest suf 0 P a woles b Real Copy couplagacent a di Quantity/ employed Quantity of hoanable Jend

b) See graph below, As government expenditure increases in goods market this will shift AD to the right , AD2 and we have new equilibrium c where Price increases and Q also increases

In labor market , supply of labor increase to meet the needs so employment increase

in lonabale fund market, Supply of loanable fund decreases as government has defecit so this will shift supply left . i have shown on graph left. But here we have to assume balance budget so this will shift supply to the right. please draw it as rightward shift on supply

6 रु AD 02 8 . 80 AMTAK SUPAUL R g

c) In case of technology

In goods market , AS shift right , price decraeses and output increases

In labor market as inputs remain same so no change in this market

In loanable fund , demand for loanable fund increase this increases the rate of interest and quantity of loanable fund also.

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