Assume that prices and wages adjust rapidly so that the markets for labor, goods, and assets are always in equilibrium. what are the effects of each of the following on output, the real interest rate, and the current price level?
a. a temporary increase in government purchases.
b. a reduction in expected inflation.
c. a temporary increase in labor supply. d
. an increase in the interest rate paid on money.

Explanation:

A) A temporary increase in government purchases

Savings would be used decreasing them. which leads to the government implementing higher taxes. The output will stay the same while the Real Interest and the price level would increase.

B) A reduction in expected inflation

This provokes more money demand. At the same time, the money price level goes down. The output and the Real Interest will remain at the same level.

C) A temporary increase in labor supply

The more jobs, the more the people have more money. Interest rate will decrease and money demand will increase. The output would increase while the Real Interest and the price level would drop.

D) An increase in the interest rate paid on money

Under this scenario, there will be a higher demand for money. If the nominal supply of money remains constant, the price level would decrease. The output will remain the same as well as the Real Interest.

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