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Consider a macro economy was initially at equilibrium level of real GDP. Using an aggregate demand and aggregate supply diagram or model of the economy, graphically illustrate and discuss the short-run and long-run effects of the following events upon the economy:
(a) The Central Bank within the economy reduces interest rates.
In case the Central Bank increases the interest rate, it will result into tightening of the providing credit. All of it will cause increase in the cost of capital and there will be reduction in the money supply. This condition will force the aggregate demand curve to move shift leftwards. If the interest rate is increased, the banks will be encouraged to lend money. But, because of the reduction in demand there will be a fall in supply.
(b) There is an increase in private domestic investment spending.
In case the private domestic investing increases, the demand for the goods will increase which means that the aggregate demand curve will shift rightward, thus causing an increase in the equilibrium price.
(c) An increase in international oil prices.
As per the law of demand and supply, if there is an increase in oil price, it should result into a fall in the demand for oil. But, this law does not work as is in the case of oil because it is a necessary product and the people will buy it even if there is an increase in its price. In this case,
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