Changes in the macroeconomy

3. (Jones Ch11 Q2/3) Consider the following changes in the macroeconomy. Show how to think about them using the IS curve, and explain how and why GDP is affected in the short run. Use both equations and graphs to answer this question. a. The Federal Reserve undertakes policy actions that have the effect of lowering the real interest rate below the marginal product of capital. b. The government offers a temporary investment tax credit: for each dollar of investment that firms undertake, they receive a credit that reduces the taxes they pay on corporate income.c. Improvements in information technology increase productivity and therefore increase the marginal product of capital.d. A housing bubble bursts, so that housing prices fall by 20% and new home sales drop sharply.4. (Jones Ch11 Q1) Suppose the parameters of the IS curve are a = 0 [all a parameters are at their long run value] b = ¾, r =2% [marginal product of capital]. Explain what happens to short-run output in each of the following scenarios (consider each separately). {In case it’s not clear, this question needs to be answered with equations and graphs]:a. The real interest rate rises from 2% to 4%.b. The real interest rate falls from 2% to 1%.c. ac increases by 1 percentage points.d. ag decreases by 2 percentage points.e. aim decreases by 2 percentage points.

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