Answer to Question #114018 in Macroeconomics for annie

Question

Suppose that initially the Turkish economy is in medium run equilibrium where Pe=P and Yn=Y. Consider the developments in the economy due to Covid19 epidemic. These will effect both the aggregate demand and supply. Investment and consumption are decreasing as well as the production of many sectors. Unfortunately, the supply side model we use in this class is very simple. However, you can consider this as a case of an increase in z in the wage setting equation.
Initially ignore the policy responses, i.e assume that there is no change in G and T as well as the Central Bank behavior.

a.Explain the effect of these developments on the good and money market. Specifically refer to the equations and explain how each equation will be effected.

b.Graphically show the impact of the same developments by using an IS-LM graph, and explain your graph.

Answer 1

a)This developments will make the prices of goods to increase and hence the money market will make the Turkish currency less powerful as it will depreciate in value. Hence Pe<P and Yn>Y