Suppose the economy begins with output equal to its natural level. Then there is an increase in consumer confidence and households attempt to consume more for a given level of disposable income. a. [3.5 points] Using the AS-AD and IS-LM models, show the effects of an increase in consumer confidence on the position of the AD, AS, IS, and LM curves in the short run and in the medium run. Precisely label all axes and curves to receive full credit. Label the short-run equilibrium and medium-run equilibrium with SR and MR, respectively. b. [2 points] Explain the transition process from the short-run equilibrium to the medium-run equilibrium. In particular, discuss what makes the equilibrium changes over time. c. [2 points] Can private saving increase in the short run when there is an increase in consumer confidence? Discuss about the necessary condition for the higher private saving in the short run.
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Suppose the economy begins with output equal to its natural level. Then there is an increase in cons...
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