1. Consider the medium run. You should assume there is no liquidity trap. Start from a medium run equilibrium. Assume that the central bank will pursue policies to keep the economy at full employment (at the natural unemployment rate).
Suppose you are the newly-elected President Trump. During your campaign, you promised voters that you would do everything in your power to get investment to grow. Suppose investors care only about the short run.
True or false? Investors would prefer a decrease in government spending rather than an increase in government spending.
2. Consider the medium run. You should assume there is no liquidity trap. Start from a medium run equilibrium. Assume that the central bank will pursue policies to keep the economy at full employment (at the natural unemployment rate).
Suppose you are the newly-elected President Trump. During your campaign, you promised voters that you would do everything in your power to get investment to grow. Suppose investors care only about the medium run.
True or false? Investors would prefer a decrease in government spending rather than an increase in government spending.