Suppose that the economy is hit by a negative demand shock (a shock that causes AD to shift left), and the central bank chooses to do nothing in response. What will happen in the long-run?
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This typically results in lower output and higher unemployment in the short run. Show more…
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Click on the blue square to apply a negative supply shock to the economy. Then adjust the movable point to view the effects of potential policy responses to the negative supply shock. Instead of reacting to the negative supply shock, policymakers choose not to respond and continue with their previous set of policies. a. Given enough time, what will occur in this economy? Input prices will increase, SRAS decreases back to a long-run equilibrium Input prices will decrease, SRAS decreases back to a long-run equilibrium Input prices will decrease, SRAS increases back to a long-run equilibrium Input prices will increase, SRAS increases back to a long-run equilibrium
Akash M.
Use the AS-AD model for this question. Assume the economy starts in equilibrium. Then, it suffers from a "negative demand shock" (assume consumer/business confidence suddenly declines significantly). A) What would be the immediate impact on the economy? B) According to a neoclassical economist, what would happen if the government keeps a "hands-off" approach? 2. Use the AS-AD model for this question. Assume the economy starts in equilibrium. Then, it suffers from a "positive demand shock" (assume consumer/business confidence suddenly improves significantly). A) What would be the immediate impact on the economy? B) According to a neoclassical economist, what would happen if the government keeps a "hands-off" approach?
The economy begins at potential GDP with an inflation rate of 2 percent. Suppose a price shock pushes inflation up to 6 percent in the short run, but the Fed views the effect on inflation as temporary. It expects the inflation adjustment line to shift back down to 2 percent the next year, and in fact, the inflation adjustment line does shift back down. If the Fed follows its usual policy rule, where will real GDP be in the short run? How does the economy adjust back to potential? Now suppose that because the Fed is sure that this inflationary shock is only temporary, it decides not to follow its typical policy rule, but instead maintains the interest rate at its previous level. What happens to real GDP? Why? What will the long-run adjustment be in this case? Do you agree with the Fed's handling of the situation?
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