Economic Question Answers
Course Code: Econ211
Course Title: Economics
(a) In the classical model, how does the interest rate move in response to shocks of autonomous changes in the economy to ensure the balance between the aggregate demand and the long-run output? Illustrate your answer with a hypothetical scenario parallel to what we observe in the real world.
(b) Explain, using Solow’s (1956) model, (i) why the seeds of long-run output growth lie in investment, which constitutes a part of the aggregate demand (AD), and (ii) how AD grows when the long-run output grows so that the balance in the goods market is maintained?
(c) How does Solow’s model help both (i) the life-cycle theory of Modigliani and (ii) the permanent income hypothesis of Friedman to solve the “consumption puzzle” identified by Kuznets?
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