# Describe the transition from a short run equilibrium to a medium run equilibrium while explaining what happens to the relevant variables such as consumption,

## Use the AS-AD model to answer this question. Suppose that initially

Use the AS-AD model to answer this question. Suppose that initially

Question
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1. Use the AS-AD model to answer this question. Suppose that initially, the economy is at a short run equilibrium where Y = Yn. Suddenly, bad economic news lowers consumer and investor confidence.
1. Show graphically what happens to production and prices in the short and medium run. Describe the transition from a short run equilibrium to a medium run equilibrium while explaining what happens to the relevant variables such as consumption, investment, interest rates, GDP, prices etc…
1. What happens to the unemployment rate in the short and medium run?
1. Suppose the central bank decides to respond immediately to the loss of confidence by firms in the short run. In particular, it wants to prevent a change in the unemployment rate in the short run following the fall in confidence. What should the central bank do? Show graphically how the central bank’s intervention and the loss of confidence together affects the AS-AD model in the short and medium run.
1. What difference is there between your response in part c) and in a) regarding prices and output in the short run?
1. What difference is there in between part c) and b) regarding the unemployment rate in the short and medium run?
1. Use the AS-AD model to answer the following question. Suppose that the economy is at an initial equilibrium where , and now the central bank reduces the money supply.
1. Use a graph to show the initial equilibrium and the dynamic adjustment from the short to medium run equilibrium.
1. What are the initial effects of a fall in M on the following variables? M/P, i, P, I and Y?
1. What happens with the unemployment rate (u) and GDP (Y) with respect to their natural rates during the transition between the short and medium run?
1. When Y is less than Yn, what happens to the AS curve for the coming year? Explain.
1. As the AS curve shifts, what happens to P, M/P, i, I and Y?
1. What are the effects on P, M/P, i, I and Y, of the fall in M in the medium run?
2. Does GDP return to its natural level? If so, what does this suggest about P and Pe in the medium run?

Use the AS-AD model to answer this question. Suppose that initially

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