8. Problems and Applications Q8 As described in the chapter, the Federal Reserve in 2008 faced a decrease in aggregate demand caused by the housing and financial crises and a decrease in short-run aggregate supply caused by rising commodity prices. Starting from a long-run equilibrium, illustrate the effects of these two changes on aggregate supply and aggregate demand on the following graph. Then on the subsequent graph, indicate what happens in a Phillips-curve diagram. Price Level LRAS Aggregate Supply Aggregate Demand Quantity of Output Aggregate Demand Aggregate Supply LRAS + Long-Run Equilibrium

8. Problems and Applications Q8 As described in the chapter, the Federal Reserve in 2008 faced a decrease in aggregate demand caused by the housing and financial crises and a decrease in short-run aggregate supply caused by rising commodity prices. Starting from a long-run equilibrium, illustrate the effects of these two changes on aggregate supply and aggregate demand on the following graph. Then on the subsequent graph, indicate what happens in a Phillips-curve diagram. Price Level LRAS Aggregate Supply Aggregate Demand Quantity of Output Aggregate Demand Aggregate Supply LRAS + Long-Run Equilibrium

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 the economy is initially at a long-run equilibrium. The Fed then increases the money supply. In the following three diagrams, assume the resulting inflation is unexpected.
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5. For each of the following, draw an Aggregate Demand- Aggregate Supply diagram with left hand axis inflation and bottom axis output to show the short-run and long-run effects on output and inflation. Assume the economy starts in long-run equilibrium and explain the consequences of any shifts: (i) An increase in consumer confidence that leads to higher consumption spending (ii) An easing of monetary policy by the Central Bank (a change in inflation target which causes a shift to the right in their Monetary Policy Reaction Function). (iii) War in Ukraine which causes a rise in government purchases. (iv) A sharp fall in oil prices post war in Ukraine.
2. The Phillips curve in the short run and long run The following graph plots aggregate demand (AD) and aggregate supply (AS) for the imaginary country of Iguazu in the year 2027. Suppose the natural level of output in this economy is $7 trillion. On the following graph, use the green line (triangle symbol) to plot the long-run aggregate supply (LRAS) curve for this economy. PRICE LEVEL 108 107 LRAS AS 108 105 104 103 102 101 A AD AD 100 2 4 10 12 14 16 OUTPUT (Trillions of dollars) Outcome C Economists forecast that if the government takes no action and the economy continues to grow at the current rate, aggregate demand in 2028 will be given by the curve labeled ADA, resulting in the outcome given by point A. If, however, the government pursues an expansionary policy, aggregate demand in 2028 will be given by the curve labeled ADB, resulting in the outcome given by point B. The following table presents projections for the unemployment rates that would occur at point A and point B.…
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5. An oil shock: Consider an economy that begins with output at its potential level and a relatively high inflation rate of 6%, reflecting some recent oil price shocks. As the head of the Federal Reserve, your job is to pick a sequence of short-run output levels that will get the rate of inflation back down to 3% no later than 3 years from now. Your expert staff offers you the following menu of policy choices: -Short-run output- -Inflation- Year 2 3% 3% 4% Option 1 2 ETUA 3 Year 1 -6% 120m - 4% NOMIN -2% Year 2 0 BEVEST -2% of evingut -2% Year 3 0 101201 0 -2% Year 1 3% ette 4% o ba 5% di (d) Explain the general trade-off that policymakers are faced with according to the Phillips curve. Year 3 3% 3% 0500 3% (a) According to these numbers, what is the slope of the Phillips curve? (b) If you as a policymaker cared primarily about output and not much about the inflation rate, which option would you recommend? Why? (c) If you cared primarily about inflation and not much about output, which…
Please answer both parts! macroeconomics; long-run. Thank you!
The Economy in 2008 In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy. Refer to The Economy in 2008. The short-run effects of the housing and financial crisis are shown by A) moving to the right along the short-run Phillips curve. moving to the left along the short-run Phillips curve. C) shifting the short-run Phillips curve right. shifting the short-run Phillips curve left.
2. Analyze the effects of the following developments on both the short-run and the long-run Phillips curves. Use the graphs and explain in detail: a) a rise in the natural rate of unemployment b) a substantial increase in the price of energy
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