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AD/AS model

Answers to questions:

Regarding the economy's adjustment process, use the AD/AS model to:

a) Show the short-run effects of an increase in desired saving(assuming that the economy is initially in a long-run equilibrium with Y* = Y).

b) Describe the adjustment process that brings the economy to its new long-run equilibrium.

c) Compare the initial and the new long-run equilibrium. WHat is the long-run effect of the increase in desired saving?

Solution Preview

a) Show the short-run effects of an increase in desired saving(assuming that the economy is initially in a long-run equilibrium with Y* = Y).

Desired saving depends on the Real Disposable Income. The rise in desired saving shifts the Sd curve to the right; in equilibrium, this reduces the real interest rate, increasing investment as well. The rise in investment will increase the ...

Solution Summary

Desired saving is determined.

$2.19