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Consider an economy that is at general equilibrium. Suppose
business firms expect marginal product of future capital (MPKf ) to
increase.
a. Using IS-LM framework show how output (Y), consumption (C),
investment (I) and real interest rate (r) change in the short run.
Show short-run equilibrium on your graph.
b. How does the price level adjust? Show the new general
equilibrium point on your graph. How do output (Y), consumption
(C), investment (I) and real interest rate (r) change from
short-run equilibrium to the new general equilibrium?