Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
expand_more
expand_more
format_list_bulleted
Question
Chapter 13, Problem 4E
(a)
To determine
Explain the two shocks.
(b)
To determine
Explain the AS/AD framework response to these shocks.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
“The oil Price run-up of 2007-08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been very similar to those observed in earlier episodes, with significant effects on overall consumption spending and purchases of domestic automobiles in particular. The experience of 2007-08 should thus be added to the list of recessions to which oil prices appear to have made a material contribution.”
a) Oil price shocks have an evident impact on the short run aggregate supply curve. With the help of a graph demonstrate how rising oil prices affect the SRAS and explain what other factors can cause this shift.
b) Different theories attempted to explain why SRAS curves slope upwards. Identify and explain these theories explaining what they have in common.
Show using a graph how the following shocks would affect equilibrium output. (Which
parameters in the Keynesian model change? How does that shift the expenditure
schedule? What happens to output as a result?)
(a) The housing market collapses
(b) Interest rates rise
(c) The US dollar depreciates (gets weaker) relative to the Euro
(d) Consumer confidence rises in Canada (Hint: use one picture to show what happens
to Canada, then another to show how this affects the US economy)
Assume that two shocks happen simultaneously: a positive expenditure shock (let’s say a popular trend is to go for a bigger house) and a positive supply shock (let’s say prices on imported inputs decreased dramatically due to a substantial reduction in tariffs). Use AE/PC Model (carefully labeled!!) without time lags (use the AE and PC graphs similarly to the textbook, place PC graph below AE graph). For your analysis, choose as a starting point (marked A) an economy operating at potential GDP (Y=Y*) and at its inflation target (? = ?#). Also, show point B where the economy is situated after the shocks but prior to any central bank policy response. There should be A and B on BOTH the upper (AE graph) and lower (PC graph) graphs. If points A and B are the same point, then just mark that point with both A and B. Mark initial curves with the superscript 1, like AE1 and PC1, and every subsequent shift with a higher number, like the second shift would be AE2 and PC2, and the third shift (if…
Chapter 13 Solutions
Macroeconomics (Fourth Edition)
Knowledge Booster
Similar questions
- "The oil price run - up of 2007 - 08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been very similar to those observed in earlier episodes, with significant effects om overall consumption spending and purchases of domestic automobiles in particular. The experience of 2007 - 08 should thus be added to this list of recessions to which oil prices appear to have made a material contribution". Oil price shocks have an evident impact on the short run aggregate supply curve. With the help of a graph demonstrate how rising oil prices affect the SRAS and explain what other factors can cause this shift.arrow_forwardWhat are supply shocks? Why are policy choices hard when there are negative supply shocks? Would you model the pandemic of 2020 as a supply shock or a demand shock? Why?arrow_forward8. For the following events, using appropriately labelled diagrams describe the short-run effects of the specific shock on the aggregate price level and aggregate output in the economy. a) The price of silicon, a key ingredient for the production of solar panels, goes up worldwide. b) The Ministry of Finance in Bangladesh lowers income tax rates. 9. The economy is currently in the long-run macroeconomic equilibrium. a) Using a graph, show the economy’s current state. b) Suppose, the government decides to raise the military spending. Using an appropriately labelled |diagram explain what will happen in the economy now. c) What policies can the government_take that might bring the economy back to long-run macroeconomic equilibrium? Show and explain the effect of one such policy with an appropriately labelled diagram. d) If the government did not intervene to close this gap, would the economy return to long-run macroeconomic equilibrium? Explain and illustrate with an appropriately…arrow_forward
- Using the ASAD graph and starting in long run equilibrium YA = Y* (see the model example in the textbook Figure 13.11) take each of following shocks one by one in separate graphs and decide if the event falls into the real shock (LRAS) category or aggregate demand (AD) shock category. Then graph each. Remember that “shocks” include both good and bad events and the graph should show that in the short run the economy is either that YA < Y* or YA > Y* A fall in the input price of oil A rise in consumer optimism A cut in business taxes if they buy new equipment Foreigners buy fewer US made goods. Consumer Fear New inventions (A) occur at a faster pace than usual A faster money growth rate A permanent cut in income taxesarrow_forwardConsider an economy that is initially in long-run equilibrium. Assume that the long- run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y= 2(M/P) and M = 1500. Suppose that a supply shock affects the economy in such a way that the price level doubles. Then, the short-run level of output becomes: 0000 1500 3000 1235 1425arrow_forwardWhat are the sources or determinants of energy price shocks? and explainarrow_forward
- Sort the following shocks into aggregate supply or aggregate demand shocks. Remember that "shocks” include both good and bad events. No need to motivate your answer. Fall in the price of oil A rise in consumer optimism A hurricane that destroys factories Good weather that creates a bumper crop A rise in sales taxes Foreigners buy fewer goods Fear New inventions occur at a faster pace A faster money growth ratearrow_forwardConsider an economy that is initially in long-run equilibrium. Assume that the long- run aggregate supply curve is vertical at Y = 3,000 (the full employment level of output) The short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y= 2(M/P) and M= 1500. Suppose that a supply shock affects the economy in such a way that the price level becomes P = 2.0. By how much must the Central Bank (CB) change the money supply if it wishes to quickly restore the full employment output level? The CB must keep the money supply constant The CB must double the money supply. The CB must lower the money supply by 50%. The CB must raise the money supply by 50%.arrow_forwardhow each of the following shocks can impact the demand or supply of oil: A. A worldwide economic recession. B. Improved oil drilling technology. C. War in a major oil producing country. D. Greaterenvironmental awareness about climate change.arrow_forward
- Assume that the economy is operating at or near its long‐run aggregate Identify one negative consequence that would result from a positive demand shock and two negative consequences that would result from a negative supply shock.arrow_forwardSuppose that due to more stringent environmental regulation it becomes more expensive for steel production firms to operate. Also, recent technological advances in plastics has reduced the demand for steel products. Use Supply and Demand analysis to predict how these shocks will affect equilibrium price and quantity of steel. Can we say with certainty that the market price for steel will fall? Why?arrow_forwardSuppose that the oil price sharply increased for a while, which increase.Can policymakers do something to accommodate this shock? Would the outcome Suppose that the oil price sharply increased for a while, which increased production costs, causing an adverse supply shock. Can policymakers do something to accommodate this shock? Would the outcome be different in this case?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSONEngineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
- Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage LearningManagerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage LearningManagerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education