Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Chapter 13, Problem 4RQ
To determine
Explain the fundamental source of transition dynamics in the AD/AS framework.
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Students have asked these similar questions
Russia’s invasion of Ukraine is causing energy prices to soar in the euro area (at an annual rate of 39% according to the Economist, June 2022). (1.a) What kind of economic shock is this for the euro area (AD or AS; positive or negative)? Use the AD/AS model to predict the effects of this shock on euro area output, prices, employment, and unemployment. Does it matter whether the shock is permanent or temporary? How must fiscal policy respond if the government’s target is price stability? How will this policy change your answer about prices, employment, and unemployment?
Include the AD/AS grap
a) In the AS/AD macro model, starting at potential GDP explain what happens in the short run when there is an exogenous increase in government consumption spending.b) What happens in the long run?c) What would be different in the short run and the long run if the initial shock had been an exogenous increase in energy prices?d) How would the answer to a) and b) have been different if the economy had started with excess capacity (and a horizontal short-run aggregate supply curve)?e) What is meant by “the GDP gap”?
Suppose an economy experiences a period of
high growth and low unemployment.
Eventually output returns to its previous level,
and but there is a sustained increase in the
price level.
In 3-5 sentences, using the AS/AD model,
describe what type of shock must have
occurred and what happened to the
economy. Be sure to include which curve(s)
must have shifted initially and which direction.
Then describe what must have occured to
reach the long-run outcome - in other words,
which curve(s) adjusted and what happened
to output, unemployment, and the price level.
Chapter 13 Solutions
Macroeconomics (Fourth Edition)
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- Consider the original AD/AS model in steady state. If the central bank fights against inflation more aggressively, explain how would inflation and short-run output respond differently to aggregate demand shock? (Hint: m-bar)arrow_forwardThe economy of Pakistan has faced both a supply demand shock in the first quarter of 2020. Using the AS/AD model explain how you expect the economy to behave in the short and long run.arrow_forwardSuppose you are Herb Stein, Chair of Economic Advisors to President Ford. OPEC has just quadrupled the price of oil. The entire economy uses oil in manufacturing (exaggeration, but not a big one), consequently the costs reflected by the AS curve dramatically increase. Using the AD/AS model, what happens to output and prices? Same role, a recession with inflation now exists(stagflation), both are serious, 10% u/e, 14% inflation. You are thinking of proposing a solution to the recession, the negative GDP gap is $300 billion, the MPC is .75. Businesses won't increase Investment because of fear of losses You remember from your econ 101 class, that there is a multiplier effect for Government Expenditures. If you just want to fix this negative gap, how much Government expenditure would you propose? Same role, Using the AD/AS model, what would you expect to be the result of your proposal in the above question, with regard to output, and inflation? Does the degree of the shape of the AD/AS…arrow_forward
- Using the dynamic AD/AS model, explain why Kennedy is concerned about the state of the global economy.arrow_forwardUsing the dynamic AD/AS model, explain why Kennedy is concerned about the state of the global economy. What difference might it make to the Australian economy if the trading relationship between China and Australia deteriorates as political tensions continue to increase?arrow_forwardAs a result of a positive supply shock, price level goes down. Use both AD-AS and MD-MS diagrams to show this event. Explain how each diagram is consistent with the outcome of the other diagram.arrow_forward
- Consider a standard AD-AS model. An increase in the interest sensitivity of consumption and/or investment demand makes the AD curve flatter and makes inflation more responsive to supply shocks. True/False. Remember to include your explanation.arrow_forwardThe imaginary country of Harris Island has the aggregate supply and aggregate demand curves as Table 24.3 shows. a. Identify the (i) equilibrium basing from the AD/AS diagram attached. b. Would you expect unemployment in this economy to be relatively high or low? c. Would you expect concern about inflation in this economy to be relatively high or low? d. Imagine that consumers begin to lose confidence about the state of the economy, and so AD becomes lower by 275 at every price level. Identify the new aggregate equilibrium. e. How will the shift in AD affect the original output, price level, and employment?arrow_forwardThe AD/AS model is static. It shows a snapshot of the economy at a given point in time. Both economic growth and inflation are dynamic phenomena. Suppose economic growth is 3% per year and aggregate demand is growing at the same rate. What does the AD/AS model say the inflation rate should be?arrow_forward
- Q)Using the dynamic AD/AS model, explain why Kennedy is concerned about the state of the global economy. What difference might it make to the Australian economy if the trading relationship between China and Australia deteriorates as political tensions continue to increase?arrow_forwardJobKeeper was designed to keep people employed and ‘sustain’ the economy through the enforced lockdown. Using the static AD/AS model explain. Use the static AD-AS model to explain how the JobKeeper policy worked to sustain the economy (even though unemployment increased).arrow_forwardDuring 2000, there was a sharp reduction in stock prices and a sharp increase in the world price of crude oil. How will aggregate demand and aggregate supply in the United States be influenced by these two factors? Using the AD-AS model, explain the expected impact on output.arrow_forward
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