Question

Consider an economy that abides by a Dynamic AS/AD model as presented in class, which, in period t-1, is in a short equilibrium that happens to coincide with a long run equilibrium. In period t there is a negative supply shock which dissipates in period t+1. There are two types of policy makers: hawks and doves. Which is true?

A. The size of the leftward shift of DAS in t is the same for Hawks and Doves

B. The size of the leftward shift of DAS in t is greater for Hawks than Doves

C. The size of the leftward shift of DAS in t is less for Hawks than Doves

D. The DAS shifts left only for Hawks

Answer 1

As we know that aggregate demand is the total demand for goods and services in the economy, while as aggregate supply is the total supply of goods and services. The interaction of AD-AS gives us the equilibrium. When short run equilibrium in period t-1 coincides with the long run equilibrium in period t+1 for the two policy makers Hawk and Doves than the result will be DAS will shift towards left only for Hawk.

The correct option is (D).

The DAS shifts left only for Hawks.

This leftward shift is due to higher inflation expectations.

Hope you got the answer.

Thanks!