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Example: Perm increase in G, with fed policy intervention (keep P @ Po)

Example: Perm increase in G, with fed policy intervention (keep P @ Po). Notes:. IS and AD moves right, increase in G Y goes up in short term (only by G. I goes down and C stays put). Because r goes up, we “entice” firms to keep producing by increasing P.

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Example: Perm increase in G, with fed policy intervention (keep P @ Po)

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  1. Example: Perm increase in G, with fed policy intervention (keep P @ Po) Notes: IS and AD moves right, increase in G Y goes up in short term (only by G. I goes down and C stays put) Because r goes up, we “entice” firms to keep producing by increasing P. - shifts LM left, raising r even more - shifts labor supply down Nd Fed Intervention: Bring P back to Po. They accomplish this by taking money out of the economy. (Sell government bonds). This action moves LM further left and AD back to the initial state. Additionally, W/P returns to normal position (W does *not* increase) |ΔI|=|ΔG| The r increase here is the same r increase inexample with no fed intervention. It is the r needed to crowd out investment. Short Run 0 0 0 0 0 0 0 0 Long Run 0 0 0 0 0 0 0 0 0 0 0 0

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