If the LRAS curve shifts, does the AS curve also have to shift? If the AS curve shifts, does the LRAS curve also have to shift? (Hint: Consider the factors that shift each curve and determine whether these factors also shift the other curve.)The Federal Reserve can use expansionary/contractionary policy to shift the AD curve. Use the AD–AS framework to show how monetary policy should be used to return output to potential GDP when: (i) the aggregate demand curve intersects the short-run aggregate supply curve to the left of potential GDP; and (ii) the aggregate demand curve intersects the short-run aggregate supply curve to the right of potential GDP.Given that the economy can correct itself and return to potential GDP, why would the Fed pursue contractionary monetary policy following a negative aggregate supply (inflation) shock? How could the Fed pursuing a contractionary monetary policy be preferable to the economy correcting itself? Is it possible that a contractionary monetary policy could hurt the economy, given the lags in the impact of monetary policy actions? Explain.

Note:- Dear learner as you have posted multiple questions. As per our policy we have solved only first question here. Please post the remaining questions separately. Thank you! __________________________ The short run is the time span during which prices, including wages, are sticky. In the long run, the economy will have reached its natural level of employment and potential output after achieving complete wage and price flexibility and market adjustment. At the potential output, the long-term aggregate supply curve is a vertical line. The long-term equilibrium The intersection of the aggregate demand and supply curves determines an economy's real GDP and price level. The quantity of total output that will be produced at each price level in the short run can be shown by the upward-sloping short-run aggregate supply curve.The shift in the long run aggregate supply curve causes shift in the short run aggregate supply curve. If long run supply curve shifts to right, the short run aggregate supply will also shift to right as well. As shown in the below diagram. The Long run aggregate supply curve shifts from the LRAS to LRAS1. it leads to shift in the short run aggregate supply curve from SRAS to SRAS1. The better technology and rise in production capacities cause shift in the LRAS and SRAS. The aggregate supply curve will change in the short run without necessarily changing in the long run. Short-run factors affect the short-term aggregate supply, but they have no impact on the long-term aggregate supply. For instance, the long run aggregate supply curve did not shift to the left during the oil crisis, but the short run aggregate supply curve did. In this diagram below, the SRAS shifts to left but LRAS is not affected by the such change in short run aggregate supply.

Answered: If the LRAS curve shifts, does the AS…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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If the LRAS curve shifts, does the AS curve also have to shift? If the AS curve shifts, does the LRAS curve also have to shift? (Hint: Consider the factors that shift each curve and determine whether these factors also shift the other curve.)
The Federal Reserve can use expansionary/contractionary policy to shift the AD curve. Use the AD–AS framework to show how monetary policy should be used to return output to potential GDP when: (i) the aggregate demand curve intersects the short-run aggregate supply curve to the left of potential GDP; and (ii) the aggregate demand curve intersects the short-run aggregate supply curve to the right of potential GDP.
Given that the economy can correct itself and return to potential GDP, why would the Fed pursue contractionary monetary policy following a negative aggregate supply (inflation) shock? How could the Fed pursuing a contractionary monetary policy be preferable to the economy correcting itself? Is it possible that a contractionary monetary policy could hurt the economy, given the lags in the impact of monetary policy actions? Explain.

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