Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 8, Problem 5AP
To determine
To analyze:The type of shock that is implicitly assumed to be hitting the economy.
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As 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.
Assume there is a particular short-run aggregate supply curve for an economy and the curve is relevant for several years. Use the AD-AS analysis to show graphically why higher rates of inflflation over this period would be associated with lower rates of unemployment, and vice versa. What is this inverse relationship called?
Discuss one specific example of cost-push inflation for the case of Malaysia? Explain clearly the intuition and illustrate the effect using the AD-AS model?
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- Consider a standard AD-AS model.An increase in the inflation target is associated with a short-run decrease in unemployment but not along-run decrease in unemployment.Answer true, false, or uncertain. Please briefly explain your answer.arrow_forwardSuppose, initially the Australian economy is at full employment (in other words the economyis at the potential GDP). Using AD-AS model, explain how would each of the following eventsaffect the economy both in the immediate and in the long term.a) A slowdown in China’s economic growth due to the sub-prime crisis in the USarrow_forwardConsider a standard AD-AS model. The economy is affected by the following sequence of events. In period 1 there is a shock to the economy that is temporary. In period 2, the shock ends. But having observed an inflation outcome different to the inflation target, inflation expectations change from the inflation target to a value exactly equal to the observed inflation in period 1 (that is, expectations are not `anchored’). A temporary positive demand shock would lead to output above potential in period 1, but below potential in period 2. Answer true or false. Please briefly explain your answer.arrow_forward
- In the AD-SRAS-LRAS model, what is the only possible way to simultaneously lower inflation (downward pressure on the price level, P) and increase employment (lower unemployment)? [This is just a question on how the schedules can geometrically show this result (no need to draw a diagram).]arrow_forwardConsider a standard AD-AS model. The economy is affected by the following sequence of events. In period 1 there is a shock to the economy that is temporary. In period 2, the shock ends. But having observed an inflation outcome different to the inflation target, inflation expectations change from the inflation target to a value exactly equal to the observed inflation in period 1 (that is, expectations are not `anchored’). A temporary Negative demand shock would lead to output below potential in period 1, but above potential in period 2. Answer true or false. Please briefly explain your answer.arrow_forwardConsider a standard AD-AS model. If the SRAS curve is steep, a temporary tax cut leads to a relatively small increase in inflation and relatively large decrease in unemployment.Answer true, false, or uncertain. Please briefly explain your answer.arrow_forward
- Thank you so much for your time and effort! Please note that this is a multi part quesition! Figure 2: Keynes’s AD-AS Model (Image normally goes here) Part 1:Changes in which factors could cause aggregate demand to shift from AD to AD1? What could happen to the unemployment rate? What could happen to the inflation rate? Part 2: The Keynesian AD-AS model describes what happens with price levels when aggregate demand increases. Could you find any evidence from the last ten-fifteen years that might support AD-AS model descriptions of demand-pull inflation, cost-push inflation, and recession? For example, you could find data on the GDP’s of any two countries from 2000 to 2017 to support your findings. Please note the followong for the next 3 parts of this. In macroeconomics, the immediate short run is known as a length of time when both input prices and output prices are fixed. In the short-run, input prices are fixed but output prices are variable. In the long run, input prices and…arrow_forwardSort 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_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_forward
- The 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_forwardWhich of the following is a statement that you would AGREE with? Explain why. Use the AD-AS model. Assume the ceteris paribus assumption holds in all cases and that the economy is initially in short run macroeconomic equilibrium. 1. We observe a decrease in the price level and a decrease in real GDP. A possible explanation is an increase in expected future income or decrease in interest rates. 2. We observe a decrease in the price level and a decrease in real GDP. A possible explanation is an expansionary monetary policy or an increase in government spending. 3. We observe an increase in the price level and an increase in real GDP. A possible explanation an increase in expected future profit or an expansionary fiscal policy.arrow_forwardUse the IS-LM model to analyze the short run impact of a fall in consumer confidence on the economy. You must provide a complete discussion of the impact including how the shock transmits through the economy & illustrate the impact on a diagram. The discussion must explain how consumers and producers respond in the economy; this means an intuitive discussion must be provided [see lecture for example].arrow_forward
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