Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Chapter 13, Problem 5E
To determine
Explain the AS/AD framework response to these shocks.
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Which of the following would properly be classified as an unfavorable supply shock?
a)The interest rate decreases, spurring investment spending.
b)The government introduces a set of market reforms that strengthens property rights and makes it easier and safer for buyers and sellers to write contracts.
c)The world price of oil increases rapidly without warning and is expected to remain at the new high level for many years, making it more expensive for all firms to produce goods and services.
d)There is a technological improvement that allows firms to reduce their costs of production permanently.
e)There is an increase in government spending.
AD/AS model.
Country A is an oil exporting country. The aggregate demand and supply functions are given as below:
AD : Y = 710 − 30P + 5G+3Poil
AS : Y = 10 + 5P − 2Poil
where Y is real GDP, P is the price level, G is the government purchases, and Poil is the world price of oil.
Write down the equilibrium condition.
Solve for the equilibrium value of real GDP and the price level (hint: take G and Poil as known variables).
Draw the AD/AS graph to show when Poil rises in the world market, what will happen the AD and SAS curves. Explain the price level effect and the output effect due to the change of the oil price.
The 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.
How does the decision to reduce the policy rate impact the economy. Explain using the ISLM model focusing on impacts on the goods and services market and the financial market.
Chapter 13 Solutions
Macroeconomics (Fourth Edition)
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- You are a member of the president's Council of Economic Advisers for the country of Manulo. Currently the economy of Manulo is operating at full employment, but a new crisis has hit the nation of Zedland, a major trade partner. Zedland's unemployment has hit record highs and stock market has crashed unexpectedly. Your team must analyze how this external shock may impact the economy in Manulo. Prepare a brief report that answers the following questions: 1. Which curve, aggregate demand (AD), short run aggregate supply (SRAS) or long run aggregate supply (LRAS) would immediately shift in response to the crisis in Zedland? In which direction (left or right? Explain your rationale. In other words, why does the curve shift? 2. Compare the expected movements in equilibrium GDP and price level in the short run. In other words, compared to the starting point (before the shift) what happened to output and price level (increased, decreased or stayed the same) and after the shift? 3. Compare the…arrow_forwardRussia’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 graparrow_forwardA negative oil price shock: It is common to blame some of the poor macro- economic performance of the 1970s on the rise in oil prices. In the middle of the 1980s, however, oil prices declined sharply. Using the AS/AD framework, explain the macroeconomic consequences of a one-time negative shock to the infation rate, as might occur because of a sharp decline in oil prices.arrow_forward
- In 2020, the COVID-19 struck and disrupted the world. As a result of this virus, we saw a decrease in Aggregate Demand, which lead to our production to nearly halt in several industries. For this discussion, your task is to: Think about some industry or type of firm that you have knowledge about and explain how that industry has been affected by COVID-19. Then explain how this impact could demonstrated in our AD/AS model.arrow_forwardAssume the economy operates in the intermediate range of aggregate supply curve. Using the AS/AD model, discus the impact of the following events on the price level and real GDP, and provide relevant figures. a) The recent oil production cut by OPEC and its allies, including Russia, disrupted the global oil market. b) An expansionary monetary policy on which the interest rate is lowered.arrow_forwardUsing AD/AS analysis, critically evaluate the problems economic policy makers may face in response to a health pandemic that closes the economy for a period of time. In your answer, use diagrams and focus specifically on the effectiveness of monetary and fiscal policy and comment on the potential long-run implications of the pandemic on the economy. The diagrams used should be your own and not taken from another source.arrow_forward
- Given the AD/AS framework described by: Ý = ā – bm(T, – ī) - Th, = T,-1 + vY; + ō, During the pandemic, US households could not go out and spend their income on services (restaurants, movies, etc) provided by US firms. Instead, they spent their income to buy more goods that they could use at home and which mostly were produced abroad. Which parameter would you change in the model to capture such an event? O Y: a 10arrow_forwardMacroland is recognized as a high-income economy by the World Bank. The country of Macroland is now in a recession. Using a correctly labeled graph of the long run aggregate supply, short run aggregate supply, and aggregate demand curves and show each of the following: Current price level, labeled PL1 Current output, labelled Y1 Assume that Braveland, a major trading partner of Macroland, enters into a recession. Explain the effect on Macroland exports to Braveland On your graph in part (a) above, show the effect of the change identified in part (b) (i) above on real output in Macroland. How would this change in real output in Macroland affect unemployment in Macroland? Assume the recession in Braveland causes a decrease in the demand for Macroland dollars in the foreign exchange market. Braveland’s currency is the euro. Explain whether the euro will appreciate, depreciate, or remain…arrow_forwardMacroland is recognized as a high-income economy by the World Bank. The country of Macroland is now in a recession. Using a correctly labeled graph of the long run aggregate supply, short run aggregate supply, and aggregate demand curves and show each of the following: Current price level, labeled PL1 Current output, labelled Y1 Assume that Braveland, a major trading partner of Macroland, enters into a recession. Explain the effect on Macroland exports to Braveland On your graph in part (a) above, show the effect of the change identified in part (b) (i) above on real output in Macroland. How would this change in real output in Macroland affect unemployment in Macroland? Assume the recession in Braveland causes a decrease in the demand for Macroland dollars in the foreign exchange market. Braveland’s currency is the euro. Explain whether the euro will appreciate, depreciate, or remain…arrow_forward
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