Assuming that a representative economy is at the long-run equilibrium, suppose the economy experiences improved consumer confidence that increases the economy wide growth of investment.
(i) Use the basic aggregate demand and aggregate supply model to illustrate what happens in the short run. How would you expect the reserve bank to respond?
(ii) Use the basic aggregate supply and demand model to illustrate what you would expect to happen in the long run following this demand shock and consequent policy response.