Answer to Question #114394 in Macroeconomics for jasmin

Question

Now suppose government expenditure (G) increases and there is an increase in
the overall price level (P). By using the IS curve and Fed (Central Bank) Rule curve
graph, explain the effect of these changes on the interest rate and output in the ShortRun. Explain each step in your graph.

Answer 1

An increase interest rate increases output in the short run .As government spending increases , output increases for any given interest rate.At lower interest rates, equilibrium output in the goods market is higher .An increase in government spending shifts out the lS curve . Equation that shows how the Fed's interest rate depends on the state of the economy.In the FED rule, FED raises interest rate as output increases , other things being equal.