2. Consider the IS-LM model derived in class. Suppose the economy of Economica is initially at the general equilibrium. This year, Economica's economy is hit by a negative oil price shock, i.e., oil prices in Economica increase dramatically. a. Explain and show graphically how an oil price shock affects the labor, goods, or the asset market b. Explain and show graphically how an oil price shock affects the short-run equilibrium in the IS-LM model c. Explain and show graphically how an oil price shock affects the general (long-run) equilibrium in the IS-LM model

2. Consider the IS-LM model derived in class. Suppose the economy of Economica is initially at the general equilibrium. This year, Economica's economy is hit by a negative oil price shock, i.e., oil prices in Economica increase dramatically. a. Explain and show graphically how an oil price shock affects the labor, goods, or the asset market b. Explain and show graphically how an oil price shock affects the short-run equilibrium in the IS-LM model c. Explain and show graphically how an oil price shock affects the general (long-run) equilibrium in the IS-LM model

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose that the coronavirus pandemic (COVID 19) in 2020 has resulted in a leftward shift of the aggregate demand curve (it has also shifted the short-run aggregate supply to the left, but let’s ignore this effect here for simplification). A. Use the aggregate-demand/aggregate-supply model to show the effects on output and the price level/inflation in both the short run and long run (assume that the short-run aggregate supply curve is upward sloping). B. Show the adjustment process of the economy from the short run to the long run. C. What is the effect on unemployment in short run and long run? D. Can policymakers use monetary policy (and/or fiscal policy) to accommodate this shock? Describe what happens to the economy in response to this policy action.
Using the ASAD graph and starting in long run equilibrium YA = Y* (see the model example in the textbook Figure 13.11) take each of following shocks one by one in separate graphs and decide if the event falls into the real shock (LRAS) category or aggregate demand (AD) shock category. Then graph each. Remember that “shocks” include both good and bad events and the graph should show that in the short run the economy is either that YA < Y* or YA > Y* A fall in the input price of oil A rise in consumer optimism A cut in business taxes if they buy new equipment Foreigners buy fewer US made goods. Consumer Fear New inventions (A) occur at a faster pace than usual A faster money growth rate A permanent cut in income taxes
Suppose the economy is in the long-run equilibrium. b. Now suppose war in the world's main oil- producing region sharply reduces the world oil supply, causing oil prices to rise and increasing the costs of producing goods and services in this economy. Use your diagram to show what happens to output and the price level in the short run. c. Use the sticky-wage theory of aggregate supply to explain what will happen to output and the price level in the long run (assuming there are no policy changes). What role does the expected price level play in this adjustment? Be sure to illustrate your analysis in a graph.
a. Beginning with long-run equilibrium, use the aggregate demand (AD) and aggregate supply (AS) model to explain (and illustrate) what happens in the short run when the economy suffers a negative supply shock. Be sure to detail what happens to aggregate demand, aggregate supply, the price level, the level of GDP, and unemployment.
Assume that the economy is initially in equilibrium at potential GDP. Then suppose that the economy is hit simultaneously with a positive aggregate demand shock and a negative aggregate supply shock: There is a large increase in U.S. exports to Europe and a large increase in oil prices. A: Use an AD–AS graph to illustrate the initial equilibrium and the short-run equilibrium after the shocks. Do we know with certainty whether in the new equilibrium the output level will be higher or lower than potential GDP? B: Suppose that the Fed decides not to intervene with monetary policy. Show how the economy will adjust back to long-run equilibrium. C: Now suppose that the Fed decides to intervene with monetary policy. If the Fed’s policy is successful, show how the economy adjusts back to long-run equilibrium.
Shown on the right is an aggregate demand-aggregate supply graph of an economy initially in a long-run equilibrium at point A. Now suppose the economy experiences a negative aggregate supply shock. 1.) Using the line drawing tool, draw the new aggregate supply curve and label it as 'SRAS2'. 2.) Using the point drawing tool, identify the new short-run equilibrium point and label it as 'B'. 3.) Using the point drawing tool, identify the new long-run equilibrium point and label it as 'C'. Carefully follow the instructions above and only draw the required objects. Price Level P₁ ما LRAS A AD₁ SRAS. Real GDP
Compare the effects of a change in money supply and technology in a model with fully sticky prices and partially sticky prices. Describe the dynamics that makes the model move from a short run equilibrium to a long run equilibrium. How would your answers be different if the model had perfectly flexible prices. Why short run equilibrium output level is not efficient? Give proper economic reasoning.
Assuming Aggregate Demand and Aggregate Supply are initially at ADo and ASo respectively, which of the following explains the adjustment towards long-run equilibrium depicted in Figure B? a. Unemployment (resulting from the short-run equilibrium being below LRAS) causes wages to decline, which increases AS till long-run equilibrium is attained at full employment level of income and a lower price level. b. Government spending is increased, increasing AD to a level sufficient to attain long-run equilibrium at full employment level of income and a higher price level c. In attempting to produce beyond the economy's natural level of GDP, producers bid up wages and prices of other resources, causing the AS to decrease to the point where long-run equilibrium is restored. d. Taxes are increased reducing AD to a level consistent with long-run equilibrium
The economy of Ashenvale is currently in a long-run equilibrium, depicted by point E. on the graph. Suppose that there is an AS shock to the economy and the AS curve shifts to the right, as shown by the AS, curve on the graph. Which of the following factors could have caused this shock? A. a decrease in investment expenditures B. a decrease in the price of oil C. a decrease in government spending OD. an increase in exports OE. an increase in the factor prices Price Level (P) 2,400- 2,000- 1,600- 1,200- 800- 400- 0+ 2,000 Economy of Ashenvale 4,000 ¡Y* 6,000 Real GDP (Y) ASO Eo 8,000 AS₁ ADO 10,0
Solve last three subparts
IS-MP and short-run output fluctuations: In the short-rum model, consider a domestic increase in demand for foreign goods. In particular, suppose that domestic residents experience a large increase in their taste for foreign-made products leading to an increase their demand for breign products. Using the standard IS/MP framework (recall, the MP curve is a horizontal line delineating where R lies across the IS curve), explain the macroeconomic comequences of the shock. If you were in charge of the Fed, how would you respond to stabilize short-run output?
Sub : EconomicsPls answer very fast.I ll upvote. Thank You 3)- Consider if in a given economy, the parliament approves an increase in minimum wage. Starting from the medium run equilibrium, when economy is at full employment to discuss the effects of this shock. a)- Using a set of WS/PS curves, and only in labor market, in step by step way, explain the impacts. b)- Using the aggregate supply and demand (AS/AD), and IS/LM curves, show the short and medium run equilibrium points. [No explanation, only neat and well-marked graphs are acceptable]