An economy is initially in long-run equilibrium. Suppose an oil cartel breaks up, causing a favorable supply shock. (a) What happens to prices and output in the short run? (b) What would happen to prices and output in the long run if there is no policy action? (c) If the central bank wants to prevent the short-run changes in price and output, what policy action could it take? How would the results of this policy action differ from the prices and output that would result in the long run with no policy action?
An economy is initially in long-run equilibrium. Suppose an oil cartel breaks up, causing a favorable supply shock. (a) What happens to prices and output in the short run? (b) What would happen to prices and output in the long run if there is no policy action? (c) If the central bank wants to prevent the short-run changes in price and output, what policy action could it take? How would the results of this policy action differ from the prices and output that would result in the long run with no policy action?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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An economy is initially in long-run equilibrium. Suppose an oil cartel breaks up, causing a favorable
supply shock.
(a) What happens to prices and output in the short run?
(b) What would happen to prices and output in the long run if there is no policy action?
(c) If the central bank wants to prevent the short-run changes in
action could it take? How would the results of this policy action differ from the prices and
output that would result in the long run with no policy action?
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