Question

If there is a permanent decrease in my potential output and also my AS curve shifts...

If there is a permanent decrease in my potential output and also my AS curve shifts left do to an inflation shock, what will happen in the short run and the long run. Will the economy try to go back to original potential output level by shifting AS curve to right or stay at the new lower potential output level?

Homework Answers

Answer #1

The economy will stay at the new potential output with the increased inflation. The permanent shock will shift the long run aggregate supply curve to the left and the short run aggregate supply curve upwards finally the economy will reach at a lower output with an increased inflation, and that is the rise in the prices. This is shown by the graph below, it is not the aggregate supply curve that will shift, it would be the aggregate demand curve. The government may introduce an expansionary fiscal or moonetary policy in the economy. But that will not be effective

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
When the economy is producing at an output level below the potential output, the unemployment rate...
When the economy is producing at an output level below the potential output, the unemployment rate is above the natural rate of unemployment. the short-run aggregate supply curve will slowly shift to the left when wages start to adjust. the intersection of the short-run aggregate supply curve and the aggregate demand curve is to the right of the long-run aggregate supply curve. the economy might be at the long-run equilibrium. Which of the following is not a determinant of the...
11.   Demand-pull inflation occurs when the aggregate __________ curve shifts _______. A.   demand, right B.    demand, left C.    supply, right...
11.   Demand-pull inflation occurs when the aggregate __________ curve shifts _______. A.   demand, right B.    demand, left C.    supply, right D.   supply, left 12.   When the aggregate price level decreases, the resulting decrease in interest rates will most likely ___________ investment and _____________ consumption. A.   increase, increase B.    increase, decrease C.    decrease, increase D.   decrease, decrease 13.   The economy is operating at full capacity.  The long-run aggregate supply curve is __________.  In the long run, an increase in the aggregate price level will __________ output. A.   horizontal, increase B.    horizontal, not change C.    vertical, increase D.   vertical,...
Suppose that a permanent decrease in oil prices both creates and inflationary shock and increases potential...
Suppose that a permanent decrease in oil prices both creates and inflationary shock and increases potential output. Use an AD-AS diagram to show the effects of the oil price decrease on output and inflation in the short run and long run given that the RBA can only move along the PRF. Explain how there is no longer a short run or long run outcome that results and how what happens depends on the relative size of the shift in potential...
What is the effect of an adverse supply shock? a. The long-run aggregate supply curve shifts...
What is the effect of an adverse supply shock? a. The long-run aggregate supply curve shifts to the left. b. The short-run aggregate supply curve shifts to the right. c. The long-run Phillips curve shifts to the left. d. The short-run Phillips curve shifts to the right.
1. The aggregate demand curve shifts to the right when the Fed: a. increases its target...
1. The aggregate demand curve shifts to the right when the Fed: a. increases its target inflation rate, reflected by a downward shift in the Fed’s policy reaction function. b. decreases its target inflation rate, reflected by an upward shift in the Fed’s policy reaction function. c. increases real interest rates in response to inflation, but does not change its target inflation rate or the Fed’s policy reaction function. d. decreases real interest rates in response to inflation, but does...
5- If an economy is in short-run equilibrium where the level of real GDP is less...
5- If an economy is in short-run equilibrium where the level of real GDP is less than potential output, then, in the long run, one will find: A-Nominal wages will rise and the SRAS curve will shift left bringing the economy back to its potential real GDP. B-Nominal wages will rise shifting the AD curve to the right and restoring real GDP to its potential level C-Nominal wages will fall and the SRAS curve will shift right bringing the economy...
Question) If the natural rate of unemployment falls, a. both the short-run Phillips curve and the...
Question) If the natural rate of unemployment falls, a. both the short-run Phillips curve and the long-run Phillips curve shift. b. only the short-run Phillips curve shifts. c. only the long-run Phillips curve shifts. d. neither the short-run nor the long-run Phillips curves shift. Question) If the long-run Phillips curve shifts to the right, then for any given rate of money growth and inflation the economy has a. higher unemployment and lower output. b. higher unemployment and higher output. c....
1.   Which one of the following shifts the aggregate demand curve leftward? Select one: a. An...
1.   Which one of the following shifts the aggregate demand curve leftward? Select one: a. An increase in the wage rate. b. An increase in the price level. c. An increase in expected deflation. d. A decrease in taxes. e. A decrease in the interest rate. 2.   Consider an economy starting from a position of full employment. Which one of the following changes does not occur as a result of an increase in aggregate demand? Select one: a. Real GDP...
Suppose a massive and severe natural disaster reduces potential output in the economy. Use the ADI-SRIA...
Suppose a massive and severe natural disaster reduces potential output in the economy. Use the ADI-SRIA diagram and show the effect of a permanent decrease in potential output on the economy in the short run and long run. Assume that the economy initially has an inflation rate of π0 and full-employment output at Yf.
The adjustment of the economy to potential real GDP in the long run from a level...
The adjustment of the economy to potential real GDP in the long run from a level of real GDP above potential real GDP occurs as nominal wages​ ________, shifting the​ short-run aggregate supply curve to the​ ________. A. ​fall; left B. ​fall; right C. ​rise; right D. ​rise; left