Question

Consider a hypothetical economy that is at a short run and long run equilibrium. Suppose that...

Consider a hypothetical economy that is at a short run and long run equilibrium. Suppose that in this economy, there is an adverse (i.e. negative) supply shock. Additionally, there is an increase in people’s expectations about future inflation. Considering the Phillips Curve, answer what will happen to:
i)    The inflation rate.
ii)    The unemployment rate.

In the short-run for such an economy.

Inflation will increase; unemployment will increase.

Inflation will decrease; unemployment will decrease.

Inflation will increase; unemployment will decrease.

Inflation will increase; the effect on unemployment is uncertain.

Homework Answers

Answer #1

Answer : The answer is option D.

Adverse supply shock shift the short-run aggregate supply curve to leftward. This increase the inflation rate and decrease the real GDP. At the same time due to people's expectation about future inflation the aggregate demand increase which shift the aggregate demand curve to rightward. This increase the inflation rate and also increase the real GDP. As at the same time the aggregate supply decreases and aggregate demand increases hence the inflation rate will increase but the changes in real GDP is uncertain. Hence based on Philips Curve the inflation rate will increase but the effects on unemployment rate become uncertain. Hence except option D other options are not correct. Therefore, option D is the correct answer.

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
Consider a hypothetical economy that is at a short run and long run equilibrium. Suppose that...
Consider a hypothetical economy that is at a short run and long run equilibrium. Suppose that in this economy, there is a change in the regulation of the labor market This change in regulation makes it easier for employers to hire and fire people, thus reducing frictional unemployment. Assume further that there is no change in people’s inflation expectations after this. Considering the Phillips Curve, answer what will happen to: i)    The inflation rate. ii)    The unemployment rate. In the...
Draw an economy in long run equilibrium. b) Suppose that the U.S. dollar depreciates. Which curve...
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...
Consider the closed-economy model. (a) Suppose the economy is initially in long-run equilibrium with Y =...
Consider the closed-economy model. (a) Suppose the economy is initially in long-run equilibrium with Y = Y¯ , r = ¯r, and P = P1. Draw IS-LM and AD-AS diagrams showing this equilibrium. (b) Suppose the economy is then hit by an adverse supply shock, which causes P1 to jump up to P2 > P1. Using Keynesian cross and money market diagrams, explain what will happen to the IS and LM curves in the short run as a result of...
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...
6) Let’s try to understand the long-run and short-run implications of monetary policy issues. Let’s assume...
6) Let’s try to understand the long-run and short-run implications of monetary policy issues. Let’s assume inflation is currently 2% and that monetary policy has an inflation targeting rule that makes desired (targeted) inflation also 2%. Finally, suppose the equilibrium real interest rate in the economy is 1% and that “beta” in the Phillips curve is 1.2. a) In the long-run, the output gap should be 0% and there should be no shocks to inflation. In that situation what will...
Please draw a fully-labeled Short-Run Phillips Curve with an inflation rate of 2% and unemployment rate...
Please draw a fully-labeled Short-Run Phillips Curve with an inflation rate of 2% and unemployment rate of 7% clearly labeled. Now on the same graph, show the effects on inflation and unemployment of an increase in the price of oil brought on by political strife in the Middle East, Venezuela and Eastern Europe (a negative supply shock).
Suppose the economy is currently in both short-run and long-run equilibrium at the equilibrium point indicated...
Suppose the economy is currently in both short-run and long-run equilibrium at the equilibrium point indicated on the graph as "E1". Also suppose that short-run aggregate supply curve is in the very short run where prices are fixed. a. Using the infinite line tool , draw both the short run and long run aggregate supply curves that must exist in order for E1 to be the equilibrium. Label these "SRAS" and "LRAS", respectively. b. Using the 3-pt curve tool ,...
Consider an economy which is in the long-run and short-run equilibrium. Propose a factor that will...
Consider an economy which is in the long-run and short-run equilibrium. Propose a factor that will lead to a decrease in the general price level and an increase in the real GDP at the same time in the short run while the LRAS curve remains unchanged. You should clearly state the factor, how the factor changes (increase or decrease) and explain how it shifts the relevant curve in the P-Y space leading to a decrease in the general price level...
The Phillips Curve is given by the following equation: Suppose that the economy begins in long-run...
The Phillips Curve is given by the following equation: Suppose that the economy begins in long-run equilibrium where the inflation rate is 2%. What will the inflation rate be in two years if the economy experiences a one-time cost shock of 2%?
suppose the Fed reduces the money supply in an economy initially in long run equilibrium. a....
suppose the Fed reduces the money supply in an economy initially in long run equilibrium. a. what will happen to output and prices in short run b. what will happen to unemployment in short run c. what will happen to output and prices in long run