For Shock H: 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. H. There is a stock market crash 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 unemployment the wages in the economy will? (decrease/increase)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*.

Answered: For Shock H: Suppose the economy…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

For Shock H:

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.

H. There is a stock market crash

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 unemployment the wages in the economy will? (decrease/increase)

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*.

Expert Solution

Step 1

The long run equilibrium is achieved where long run aggregate supply curve (LRAS), short run aggregate supply curve (SRAS) and aggregate demand curve intersects. LRAS curve is vertical in nature and aggregate demand curve is downward sloping demand curve.