The economy of Rabbit is operating according to the following IS-LM-PC model IS equation: Y - CIY - T) + Y.r+ x) + G LM equation: r-7 PC equation: al-1) (a/L) (Y- Y) where at-1) is the inflation from the previous period and Y, is the potential output. Suppose that the economy is at its potential output. Then, the government raises taxes to close the budget deficit. What would happen to this economy in both short- and medium run? IS curve shifts left. Output falls below potential output and inflation rate rises above the last year's inflation The Fed can cut the interest rate to move the economy back to the potential output in the medium run. Then, inflation would be decelerating IS curve shifts left. Output falls below potential output and inflation rate falls below the last year's inflation, The Fed can raise the interest rate to move the economy back to the potential output in the medium run. Then, inflation would be stable. IS curve shifts left. Output falls below potential output and inflation rate rises above the last year's inflation. The Fed can raise the interest rate to move the economy back to the potential output in the nedium run. Then, inflation would be accelerating O IS curve shifts left. Output falls below potential output and inflation rate falls below the last year's inflation. The Fed can cut the interest rate to move the economy back to the potential output in the medium run. Then, inflation would be stable.
The economy of Rabbit is operating according to the following IS-LM-PC model IS equation: Y - CIY - T) + Y.r+ x) + G LM equation: r-7 PC equation: al-1) (a/L) (Y- Y) where at-1) is the inflation from the previous period and Y, is the potential output. Suppose that the economy is at its potential output. Then, the government raises taxes to close the budget deficit. What would happen to this economy in both short- and medium run? IS curve shifts left. Output falls below potential output and inflation rate rises above the last year's inflation The Fed can cut the interest rate to move the economy back to the potential output in the medium run. Then, inflation would be decelerating IS curve shifts left. Output falls below potential output and inflation rate falls below the last year's inflation, The Fed can raise the interest rate to move the economy back to the potential output in the medium run. Then, inflation would be stable. IS curve shifts left. Output falls below potential output and inflation rate rises above the last year's inflation. The Fed can raise the interest rate to move the economy back to the potential output in the nedium run. Then, inflation would be accelerating O IS curve shifts left. Output falls below potential output and inflation rate falls below the last year's inflation. The Fed can cut the interest rate to move the economy back to the potential output in the medium run. Then, inflation would be stable.
Chapter13: Inflation
Section: Chapter Questions
Problem 15SQ
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Transcribed Image Text:The economy of Rabbit is operating according to the following IS-LM-PC model:
IS equation: Y - CIY - T) + (Y,r+ x) + G
LM equation: r7
PC equation: a(-1) (a/L) (Y - Y)
where at-1) is the inflation from the previous period and Y, is the potential output.
Suppose that the economy is at its potential output. Then, the government raises taxes to close the
budget deficit.
What would happen to this economy in both short- and medium run?
O IS curve shifts left. Output falls below potential output and inflation rate rises above the last year's inflation.
The Fed can cut the interest rate to move the economy back to the potential output in the medium run.
Then, inflation would be decelerating
IS curve shifts left. Output falls below potential output and inflation rate falls below the last year's inflation.
The Fed can raise the interest rate to move the economy back to the patential output in the medium run.
Then, Inflation would be stable.
O IS curve shifts left. Output falls below potential output and inflation rate rises above the last year's inflation.
The Fed can raise the interest rate to move the economy back to the potential output in the medium run.
Then, inflation would be accelerating.
O IS curve shifts left. Output falls below potential output and Inflation rate falls below the last year's inflation.
The Fed can cut the interest rate to move the economy back to the potential output in the medium run.
Then, inflation would be stable.
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