Question

Assume that the economy is beginning at equilibrium. There is a supply shock and OPEC has decided to lower production, which raises the price of oil worldwide. What will happen to the price level and RGDP in the short-run? Label the original point (A) and the new point after the shift as (B) Assume that the price level is flexible downwards as well as upwards. (3) b) Assume that the government in reaction assumes a Classical stance and does not introduce a policy shift. What happens to the economy in the long run according to Classical economists? Graph this shift and explain the process. (3) c) However, you are a Keynesian economist and therefore prepare a critique of this Classical stance. What is the resulting change in prices and RGDP from this laissez-faire stance? Label this point as (C). What instead would you propose as a necessary policy shift? Why? Describe and graph each step. (5)

Answer #1

With oil shock aggregate demand shifted leftwards from AD1 to ADo. As a result economy moves from A to c. Both prices and gdp fall

According to classicals in the longrun wages will also fall because due to lower prices purchasing power of labour has risen. Thus supply will increase from SRAS 1 to SRAS 2. Thus full employment gdp is restored back with lower prices

With laissez faire policy Aggregate demand falls and new equilbrium is at c. The result is Lower gdp and prices. Thus there is recession. (Keynesnias)

To counter this govt should raise aggregate demand back to AD1 through fiscal policy i. E by greater expenditure.

The economy is starting from a point of disequilibrium – a
recessionary gap. An economic shock then hits this economy and
there is a sudden increase in the value of the Canadian dollar.
Assume that the price level is flexible downwards as well as
upwards. What is the initial impact on the price level and RGDP?
Label the initial point (A) and the new point after the shift as
(B). What if the price level was not flexible downwards? What...

Suppose the economy is in a long-run equilibrium when a
temporary, favorable aggregate supply shock occurs. Using graphs,
show what happens to bring the economy back to long-run
equilibrium, assuming that there is no policy response. In words,
explain why no response is the best policy

Suppose the economy is in a long-run equilibrium when a
temporary, favorable aggregate supply shock occurs. Using graphs,
show what happens to bring the economy
back to long-run equilibrium, assuming that there is no policy
response. In words,
explain why .no response.is the best policy.

Draw an economy in long run equilibrium.
b) Suppose that the U.S. dollar depreciates. Which curve will
shift as a result of the shock?
c) Illustrate the shift on your graph above.
d) Explain what happens to Y, P, and unemployment in the
short-run.
e) State whether the economy is at a full-employment
equilibrium, below full-employment equilibrium, or above full-
employment equilibrium after the shock. Principles of
Macroeconomics
f) State whether the unemployment rate is above or below the
Natural...

QUESTION 50
Government policy designed to stimulate the economy (move it
back to long run equilibrium) is called
a.
bogo policy
b.
expansionary policy
c.
recessionary policy
d.
contractionary policy
1 points
QUESTION 51
Two Part Question
1. What is a recessionary gap? (Be sure to include in your
answer a discussion of actual and potential GDP)
2. What is an inflationary gap? (Be sure to include
in your answer a discussion of actual and potential GDP)
10 points ...

THIS IS THE GENERAL EQUILIBRIUM PROBLEM THAT I PROMISED. YOU
FIRST SOLVE FOR THE INITIAL EQUILIBRIUM AS POINT A. WE CONSIDER TWO
DIFFERENT AND SEPARATE SHOCKS (I CALL THEM SCENARIOS). THE FIRST
SHOCK IS TO THE IS CURVE, THE SECOND SHOCK IS A ‘LM’ SHOCK. AGAIN,
WE CONSIDER THESE SHOCKS SEPARATELY SO THAT AFTER YOU COMPLETE
SCENARIO 1 (THE IS SHOCK), WE GO BACK TO THE ORIGINAL CONDITIONS
AND CONSIDER THE SECOND SCENARIO WHICH IS THE ‘LM’ SHOCK.
Consider the...

a) Draw the U.S. economy in long run equilibrium--just draw it
on your paper.
b) Suppose that firms expect profits to decrease. Which curve
will shift as a result of the shock and in which direction?
A.
SAS will shift Left
B.
AD will shift Right
C.
AD will shift Left
D.
SAS will shift Right
c) Illustrate the shift on your graph--again, just draw it on
your paper.
d) Explain what happens to Y, P, and the unemployment rate...

3. An economy is initially at a long run equilibrium (GE).
A. On the AD-AS graph, show the AD, LRAS and SRAS curves/lines.
Label this “A”
B. The Central Bank (Federal Reserve) increases the money
supply. Give one action the Fed can take to increase the money
supply.
_________________________________
Show how this changes the AD-AS
graph. Label the curve/line that shifts with a “2” and label the
new equilibrium “B”
There is no additional policy
action:
C. Show...

QUESTION 64
Inflation occurs over time as a result of
a.
long-run aggregate supply increasing faster than short-run
aggregate supply.
b.
a bigger increase in aggregate demand than aggregate supply.
c.
a bigger increase in aggregate demand than in long-run aggregate
supply.
d.
increases in aggregate demand.
1 points
QUESTION 65
In the short-run macroeconomic equilibrium, real GDP exceeds
potential GDP. If aggregate demand does not change the
a.
long-run aggregate supply curve will shift rightward as the
money...

A. Aggregate Demand, Aggregate Supply, and
Equilibrium
For a hypothetical economy, the aggregate-demand
(AD), short-run aggregate supply
(AS), and long-run aggregate-supply
(ASLR) schedules are as follows. The
schedules show the GDP price deflator (P) versus
real GDP (Q), with Q measured in
billions of constant dollars.
P
AD
AS
ASLR
80
30
22
30
90
28
24
30
100
26
26
30
110
24
28
30
120
22
30
30
130
20
32
30
A1. GRAPHS: Graph the AD,
AS,...

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