For Shock B: Suppose the economy starts in the long run equilibrium. Illustrate changes that the shock will cause in the short run (using AD-SRAS). Explain why each curve shifts. Determine how the price level and output will be affected in the short run. Mark the output gap on the diagram. Is the output gap positive or negative? Is the economy is booming, or is it in a recession?
For Shock B:
- Suppose the economy starts in the long run equilibrium. Illustrate changes that the shock will cause in the short run (using AD-SRAS). Explain why each curve shifts.
- Determine how the price level and output will be affected in the short run.
- Mark the output gap on the diagram. Is the output gap positive or negative? Is the economy is booming, or is it in a recession?
- On the same diagram illustrate how the economy will adjust to the shock in the long run and explain the mechanism.
- Determine how the price level and output will be affected in the long run.
B. The government raises the personal income tax
As a result of this shock, in the short run the (SRAS Curve/AD Curve) will shift?
In consequence, in the short run prices and output will?
In the short run, there will be a ? (negative/postive) output gap,which means there will be a ? (boom/recession)
As time passes, because of high
As a result, the SRAS curve will shift ? (right/left), causing the price level to ? (increase/fall) and output to eventually return to its long run level Y*.
In all diagrams, AD0, LRAS0, and SRAS0 are beginning total interest, long-run total stockpile, and short-run total inventory curves meeting at point A with introductory value level P0 and genuine GDP (expected GDP) Y0.
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