Answer to Question #52839 in Macroeconomics for Ellie

Question

Consider an economy initially at equilibrium level at near full employment. Using an aggregate demand and aggregate supply diagram or model of the economy, graphically illustrate and discuss the short-run and long-run effects of the following events upon the economy:

(a) The Central Bank within the economy lifts interest rates.
(b) There is an increase in private domestic investment spending.
(c) An increase in international oil prices.
(d) A fall in real estate prices in the capital cities of the country (hint: think of the effect upon one’s wealth level) (4 marks)

Answer 1

(a) If the Central Bank within the economy lifts interest rates, the economical activity in the economy will decrease, as less people and businesses will invest money in some activities. In the long-run the inflation rate will decrease too and the economy will "cool off". 
(b) If there is an increase in private domestic investment spending, the GDP according to multiplier effect will increase in the long-run, and this increase will be higher, then the initial increase in private domestic investment spending was.
(c) An increase in international oil prices will have negative effect on the economy, as a lot of people and businesses use gasoline. So, in the short-run there will be a slowdown or even fall in GDP, but in the long-run the economy will adapt to new prices.
(d) A fall in real estate prices in the capital cities of the country will increase the wealth level of households, which in the long-run will increase the level of GDP of the whole economy.