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    Determining Equilibrium Real GDP and the Price Level

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    Consider a country with an economic structure consistent with the assumption of the classical model. Suppose that businesses in this nation suddenly anticipate higher future profitability from the investments they undertake today. Give reasons to explain whether or how this could affect the following:

    1.The current equilibrium interest rate
    2.The current equilibrium real GDP
    3.The current equilibrium employment
    4.The current equilibrium saving
    5.The future equilibrium real GDP

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    Solution Preview

    Classical thought is that there is always full employment. So when you graph price levels vs. output, the supply curve is vertical. Therefore changes in AD cause changes in employment and Real GDP. Adjustments in prices would automatically make demand tend to the full employment level. Known as Say's law, ...

    Solution Summary

    This solution assists in determining equilibrium real GDP and the price level.