Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Chapter 13, Problem 8E
(a)
To determine
Explain why the
(b)
To determine
The reason how the economy will respond to the aggregate
(c)
To determine
The reason how the economy will respond to aggregate supply if AD curve is steeply sloped.
(d)
To determine
Explain the kind of economic change in the economy that makes the curve to steeply slope.
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1. Drought In South Africa destroyed farm crops and drove up the price of food. What Is the effect on the short-run trade-off between inflation and unemployment?
2. Give an example of a favourable and unfavourable shock to the aggregate supply. Use the model of aggregate demand (AD) and aggregate supply (AS) to explain the effects of such shocks. How do these shocks affect the AD-AS curves?
For Shock A:
Suppose the economy starts in the long run equilibrium. Illustrate changes that the shock will cause in the short run (using AD-SRAS). Explain why each curve shifts.
Determine how the price level and output will be affected in the short run.
Mark the output gap on the diagram. Is the output gap positive or negative? Is the economy is booming, or is it in a recession?
On the same diagram illustrate how the economy will adjust to the shock in the long run and explain the mechanism.
Determine how the price level and output will be affected in the long run.
A. Oil prices suddenly increase worldwide
As a result of this shock, in the short run the (SRAS Curve/AD Curve) will shift?
In consequence, in the short run prices and output will?
In the short run, there will be a ? (negative/postive) output gap,which means there will be a ? (boom/recession)
As time passes, because of high unemployment the wages in the economy will? (decrease/increase)
As a result, the SRAS…
For Shock B:
Suppose the economy starts in the long run equilibrium. Illustrate changes that the shock will cause in the short run (using AD-SRAS). Explain why each curve shifts.
Determine how the price level and output will be affected in the short run.
Mark the output gap on the diagram. Is the output gap positive or negative? Is the economy is booming, or is it in a recession?
On the same diagram illustrate how the economy will adjust to the shock in the long run and explain the mechanism.
Determine how the price level and output will be affected in the long run.
B. The government raises the personal income tax
As a result of this shock, in the short run the (SRAS Curve/AD Curve) will shift?
In consequence, in the short run prices and output will?
In the short run, there will be a ? (negative/postive) output gap,which means there will be a ? (boom/recession)
As time passes, because of high unemployment the wages in the economy will? (decrease/increase)
As a result, the…
Chapter 13 Solutions
Macroeconomics (Fourth Edition)
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Similar questions
- 13. Using an AS/AD diagram, illustrate the effects of an aggregate supply shock. What happens in the short run to: Output? Unemployment? Price level? Explain how the economy returns to the long run level of output. What happens in the long run, if the economy self adjusts, to: Output? Unemployment? Price level? What policies could the government use to stabilize the economy? How would these policies work? What happens in the long run, if the government uses policy, to: Output? Unemployment? Price level?arrow_forwardCould you please also sort the following shocks into positive or negative aggregate supply or aggregate demand shocks? Fear New inventions occur at a faster pace A faster money growth ratearrow_forwardWhat are some examples of shocks that shift the AD curve? What about theAS curve?arrow_forward
- If the AD curve were more steeply sloped, how would the economyrespond diferently to aggregate demand shocks (shocks to a )?arrow_forwardFor Shock C: Suppose the economy starts in the long run equilibrium. Illustrate changes that the shock will cause in the short run (using AD-SRAS). Explain why each curve shifts. Determine how the price level and output will be affected in the short run. Mark the output gap on the diagram. Is the output gap positive or negative? Is the economy is booming, or is it in a recession? On the same diagram illustrate how the economy will adjust to the shock in the long run and explain the mechanism. Determine how the price level and output will be affected in the long run. C. Firms expect an economic boom in the coming years As a result of this shock, in the short run the (SRAS Curve/AD Curve) will shift? In consequence, in the short run prices and output will? In the short run, there will be a ? (negative/postive) output gap,which means there will be a ? (boom/recession) As time passes, because of high unemployment the wages in the economy will? (decrease/increase) As a result,…arrow_forwarda) 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”?arrow_forward
- For Shock H: Suppose the economy starts in the long run equilibrium. Illustrate changes that the shock will cause in the short run (using AD-SRAS). Explain why each curve shifts. Determine how the price level and output will be affected in the short run. Mark the output gap on the diagram. Is the output gap positive or negative? Is the economy is booming, or is it in a recession? On the same diagram illustrate how the economy will adjust to the shock in the long run and explain the mechanism. Determine how the price level and output will be affected in the long run. H. There is a stock market crash As a result of this shock, in the short run the (SRAS Curve/AD Curve) will shift? In consequence, in the short run prices and output will? In the short run, there will be a ? (negative/postive) output gap,which means there will be a ? (boom/recession) As time passes, because of high unemployment the wages in the economy will? (decrease/increase) As a result, the SRAS curve will…arrow_forwardAggregate demand curve of an economy is given by AD = 50 - 0.2P, the long-run aggregate supply, LRAS, is 30 and the short-run aggregate supply is given by SRAS = 0.3 P (all output measures are in US$ billions and the price level is given as an index number). A negative demand shock shifts the aggregate demand curve to the left. The new AD curve is given by AD = 49 - 0.2P. Find the new short-run equilibrium. Find the output gap as a percentage. What is the unemployment rate based on Okun's Law if the natural rate of unemployment is 4%? Short-run equilibrium: Price level is and the output is US$ billions Output gap as a percentage is: %. Unemployment rate is: %.arrow_forwardFor Shock I: Suppose the economy starts in the long run equilibrium. Illustrate changes that the shock will cause in the short run (using AD-SRAS). Explain why each curve shifts. Determine how the price level and output will be affected in the short run. Mark the output gap on the diagram. Is the output gap positive or negative? Is the economy is booming, or is it in a recession? On the same diagram illustrate how the economy will adjust to the shock in the long run and explain the mechanism. Determine how the price level and output will be affected in the long run. I. A pandemic causes households to stay home all the time; as a result, they reduce their consumption As a result of this shock, in the short run the (SRAS Curve/AD Curve) will shift? In consequence, in the short run prices and output will? In the short run, there will be a ? (negative/postive) output gap,which means there will be a ? (boom/recession) As time passes, because of high unemployment the wages in the…arrow_forward
- Which of the following answers best describes how policy makers should respond to negative aggregate demand (AD) shocks relative to negative aggregate supply (AS) shocks. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. Policy makers should respond to a negative AD shock with a positive AD shock. They should respond to a negative AS shock by not responding at all. a Policy makers should respond to a negative AD shock with a positive AD shock. They should respond to a negative AS b shock with a positive AD shock. Policy makers should respond to a negative AD shock with a positive AD shock. They should respond to a negative AS shock with a negative AD shock. Policy makers should respond to a negative AD shock with a positive AD shock. There is no best response to a negative AS d. shocks.arrow_forwardDescribe an economic environment which would be characterized by the term "stagflation". Using an AD - AS diagram, depict and given an example of a macroeconomic shock that would take an economy from a long - run equilibrium to a situation of stagflation. Label all points on the graph completely and point out the key characteristics associated with stagflation on your graph.arrow_forwardAggregate Demand and Aggregate Supply - End of Chapter Problems 10. There were two major shocks to the U.S. economy in 2007, leading to the severe recession of 2007-2009. One shock was related to oil prices; the other was the slump in the housing market. In the accompanying graph, shift the AD and/or SRAS curves and move the equilibrium point to its new position to show the effects of the following two shocks on GDP in the AD-AS framework. a. Data taken from the Department of Energy indicate that the average price of crude oil in the world increased from $54.63 per barrel on Jan. 5, 2007, to $92.93 on Dec. 28, 2007. b. The Housing Price Index, published by the Office of Federal Housing Enterprise Oversight, calculates that U.S. home prices fell by an average of 3% in the 12 months between January 2007 and January 2008. c. As a result of the two shocks, real GDP decreased price level increased , whereas the aggregate Aggregate price level Incorrect E [1] Real GDP SRAS ADarrow_forward
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