14. In the accompanying diagram, the economy is in long- run macroeconomic equilibrium at point E when an oil shock shifts the short-run aggregate supply curve to SRAS2. Based on the diagram, answer the following questions. LRAS Aggregate price level SRAS2 SRAS1 E1 P1 AD1 Y1 Real GDP a. How do the aggregate price level and aggregate output change in the short run as a result of the oil shock? What is this phenomenon known as? b. What fiscal or monetary policies can the govern- ment use to address the effects of the supply shock? Use a diagram that shows the effect of policies cho- sen to address the change in real GDP. Use another diagram to show the effect of policies chosen to address the change in the aggregate price level. c. Why do supply shocks present a dilemma for gover ment policy makers?

14. In the accompanying diagram, the economy is in long- run macroeconomic equilibrium at point E when an oil shock shifts the short-run aggregate supply curve to SRAS2. Based on the diagram, answer the following questions. LRAS Aggregate price level SRAS2 SRAS1 E1 P1 AD1 Y1 Real GDP a. How do the aggregate price level and aggregate output change in the short run as a result of the oil shock? What is this phenomenon known as? b. What fiscal or monetary policies can the govern- ment use to address the effects of the supply shock? Use a diagram that shows the effect of policies cho- sen to address the change in real GDP. Use another diagram to show the effect of policies chosen to address the change in the aggregate price level. c. Why do supply shocks present a dilemma for gover ment policy makers?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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“John Maynard Keynes introduced the AD-AS macroeconomic model (aggregate demand- aggregate supply) to determine the equilibrium level of real output and the level of prices in the economy” 1. Draw a diagram with aggregate demand, short-run aggregate supply, and long-run aggregate supply. 2. Discuss the reasons why the aggregate demand curve is downward sloping, while the short-run aggregate-supply curve is upward sloping?
3. What is the difference between the long-run aggregate supply (LRAS) and the short-run aggregate supply (SRAS) curves? Give examples of factors that decrease SRAS. Which way does the SRAS curve shift?
4.1 Distinguish between the short-run aggregate supply curve and the long-run aggregate supply curve.
4.1 Why does the short-run aggregate supply curve slope upward? 4.2 Explain why the long-run aggregate supply curve is vertical. Then, (verbally and graphically) explain how each of the following events would affect the long-run aggregate supply curve. a. A lower price levels b. A decrease in the labor force c. A decrease in the quantity of capital goods d. Technological change
a. Beginning with long-run equilibrium, use the aggregate demand (AD) and aggregate supply (AS) model to explain (and illustrate) what happens in the short run when the economy suffers a negative supply shock. Be sure to detail what happens to aggregate demand, aggregate supply, the price level, the level of GDP, and unemployment.
Please refer to the following graph representing a hypothetical macro economy. Assume that the Aggregate Demand curve has recently changed from AD1 to AD2. During that change, which phase of the business cycle was this economy in? Price Level O Expansion O Recession O Recovery O Inflation LRAS AD2 SRAS AD1 Real GDP
Use the following information to answer questions 8 through 11: The graph below shows the AD-AS diagram for Spain. Suppose that the economy experiences a negative aggregate demand shock denoted by the move from AD1 to AD2. Note that the new curve is shown in gray. 1200+ 1100 ALN 1000+ 900 Al 800 - 700- 600 500 400 - 309AS 200 100+ LRAS 200 Real GDP 300. 400 100 500 600 700 800 900 1000 1100 120 8. What has happened to the cyclical unemployment in Spain (select one)? a. Cyclical unemployment remains the same. b. Cyclical unemployment decreased. c. Cyclical unemployment increased. Price Level
Assume that the economy is initially in equilibrium at potential GDP. Then suppose that the economy is hit simultaneously with a positive aggregate demand shock and a negative aggregate supply shock: There is a large increase in U.S. exports to Europe and a large increase in oil prices. A: Use an AD–AS graph to illustrate the initial equilibrium and the short-run equilibrium after the shocks. Do we know with certainty whether in the new equilibrium the output level will be higher or lower than potential GDP? B: Suppose that the Fed decides not to intervene with monetary policy. Show how the economy will adjust back to long-run equilibrium. C: Now suppose that the Fed decides to intervene with monetary policy. If the Fed’s policy is successful, show how the economy adjusts back to long-run equilibrium.
Shown on the right is an aggregate demand-aggregate supply graph of an economy initially in a long-run equilibrium at point A. Now suppose the economy experiences a negative aggregate supply shock. 1.) Using the line drawing tool, draw the new aggregate supply curve and label it as 'SRAS2'. 2.) Using the point drawing tool, identify the new short-run equilibrium point and label it as 'B'. 3.) Using the point drawing tool, identify the new long-run equilibrium point and label it as 'C'. Carefully follow the instructions above and only draw the required objects. Price Level P₁ ما LRAS A AD₁ SRAS. Real GDP
Decide if the following events are Micro, shifting supply or demand, or Macro, shifting AD or AS. Give the direction in which the graph shifts. Aggregate Demand Supply Demand Situation Aggregate Supply Sales of Atlanta Braves gear grows with the success of the team. 1. The President and Congress pass a trillion dollar stimulus bill to provide aid during recession. 2. 3. Salmonella outbreak in peanut processing plants threatens lunches for school children. Pomegranates are shown to be cancer fighting superfoods. 4. Value of U.S. dollars declines, exports increase. 5. 6. Global oil prices tank as shale fracking surges. Housing market crashes. Federal 7. Reserve slashes interest rates. 8. House votes to block EPA regulations on coal fired electricity plants.
Question 29 Which of the following factors will not shift the long-run aggregate supply curve? O An increase in capital accumulation. An increase in available resources. An increase in the price level. An improvement in production technology.
q. Consider the following scenarios and briefly explain how each scenario would affect short-run aggregate supply (SAS), long-run aggregate supply (LAS) or aggregate demand (AD) in Canada. In some situations, more than one may be affected. 1. Canada produces larger number of university graduates who possess higher levels of education and skill. 2. Depletion of resources cause increase in the prices of key inputs in production. 3. Canada’s trading partners experience higher rates of economic growth. 4. Increase in oil prices raises the value of Canadian dollar.