Suppose the economy is in long-run equilibrium when a decrease in the interest rates causes an increase in new home sales.
a. Draw an aggregate demand/supply diagram that illustrates the short-run effect of this increase in new home sales.
b. What happens to the price level and the level of output in the short run?
c. Draw an aggregate demand/supply diagram that illustrates both the long-run and the short-run effect of this increase in home sales if the government does not use any other policy action.
d. What happens to the price level and the level of output in the long run?
e. Now suppose that the Fed decides to take action. Give an example of a monetary policy the Fed could use to return the economy to long-run equilibrium and show this in a diagram.
f. If the Fed enacts the policy you describe above, what happens to the price level and the level of output in the long-run?
g. Alternatively, suppose that fiscal policy is used. Give an example of a fiscal policy that could be used to return the economy to long-run equilibrium and show this in a diagram.
h. If the government enacts the fiscal policy you describe above, what happens to the price level and the level of output in the long-run?