Reference no: EM131923833

Economy A and Economy B are similar in every way except that in Economy A, 65 percent of aggregate expenditure is sensitive to changes in the real interest rate and in Economy B, 50 percent of aggregate expenditure is sensitive to changes in the real interest rate.

a. Which economy will have a steeper aggregate expenditure curve?

Economy ___________AB will have a steeper aggregate expenditure curve. For a given fall in the real interest rate, aggregate expenditure will increase ______lessmore in Economy A and so the curve is _______steeperflatter than in Economy B.

b. How would the dynamic aggregate demand curves differ given that the monetary policy reaction curve is the same in both countries?

Economy ________AB will have a steeper dynamic aggregate demand curve. Since the two countries have the same monetary policy reaction curve, an increase in inflation will result in the same increase in the real interest rate in both countries. This change in the real interest rate will result in a _________smallerbigger change in aggregate output in Economy A, resulting in a _________steeperflatter dynamic aggregate demand curve.