Question

11. Suppose there is an increase in autonomous investment . How would this shock impact a standard classical model? Written discussion and graphs are both needed for full credit Be sure to mention what happens to W,Y, N, P,r.C, s, Prs, Pus How would this shock impact a standard Keynesian model with perfectly sticky prices? Show graphs of the Keynesian cross, the Money market, and the IS/LM space. Note: Assume that change in investment does not impact the capital stock. Expectations are as follows: e Capture the timing in your written discussion . If a curve shifts, explain why/economie intuition . If a market is in disequilibrium, explain how it returns to equilibrium

Answer 1

We know in the standard classical model the economy regulate itself. Economist always make sure that the economy should achieve the natural level of output and it is possible only when economy�s resource is fully employed. Sometimes problems may occur in the economy i.e. total output production in the economy may fall or raise, but to make it a perfect situation or to bring back to the initial position self adjustment policy is applied. According to say�s law when the economy certain level of GDP, you need more workers to increase your production level. If there is an increase in employment it means it generates the income of the workers which will leads to increase in purchasing power. As income increases it doesn�t mean that all the income is use for consumption, post of earning is also used for savings. The part of earning which is used for savings implies that then goods will be demanded less than supply. If aggregate