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Short run effects of foreign investment

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Suppose the U.S. economy begins in long-run equilibrium. Concerns about global climate change cause the government to significantly restrict the production of electricity form fossil fuels. Because of this change in policy, foreign investors lose confidence in the economy, and the dollar falls in foreign-exchange markets.

Draw a diagram to show the short-term effect of these events, and explain why these changes occur.

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Solution Summary

How loss of foreign investor confidence can affect economic growth.

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See the attached file. The effect of the first event is indicated by the red arrow. The restriction of energy production drives up costs for suppliers, causing the short run aggregate supply (SRAS) curve to move inward. The new ...

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