Inflation Rate Price Level 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 on a Phillips-curve diagram. LRAS Quantity of Output LRPC Unemployment Rate Aggregate Supply Aggregate Demand ° Aggregate Supply LRAS Aggregate Demand Long-Run Equilibrium SRPC LRPC SRPC Long-Run Equilibrium (?) Which of the following is true as a result of the two changes in aggregate demand and aggregate supply? (Note: Do not consider the magnitudes of the shifts given on the preceding graphs. Think only about the directions of the shifts.) Check all that apply. The effect on the inflation rate will be ambiguous. The effect on unemployment will be ambiguous. The price level will rise. Equilibrium output will fall. Suppose the Fed responds quickly to these shocks and adjusts monetary policy to keep unemployment and output at their natural rates. On each of the previous graphs, adjust the curve or curves (if necessary) to show the long- run results, and place a black point (plus symbol) on the point representing the new long-run equilibrium. True or False: If the Fed takes the course of action you selected, the inflation rate will fall. True False
Inflation Rate Price Level 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 on a Phillips-curve diagram. LRAS Quantity of Output LRPC Unemployment Rate Aggregate Supply Aggregate Demand ° Aggregate Supply LRAS Aggregate Demand Long-Run Equilibrium SRPC LRPC SRPC Long-Run Equilibrium (?) Which of the following is true as a result of the two changes in aggregate demand and aggregate supply? (Note: Do not consider the magnitudes of the shifts given on the preceding graphs. Think only about the directions of the shifts.) Check all that apply. The effect on the inflation rate will be ambiguous. The effect on unemployment will be ambiguous. The price level will rise. Equilibrium output will fall. Suppose the Fed responds quickly to these shocks and adjusts monetary policy to keep unemployment and output at their natural rates. On each of the previous graphs, adjust the curve or curves (if necessary) to show the long- run results, and place a black point (plus symbol) on the point representing the new long-run equilibrium. True or False: If the Fed takes the course of action you selected, the inflation rate will fall. True False
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Inflation Rate
Price Level
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 on a Phillips-curve diagram.
LRAS
Quantity of Output
LRPC
Unemployment Rate
Aggregate Supply
Aggregate Demand
°
Aggregate Supply
LRAS
Aggregate Demand
Long-Run Equilibrium
SRPC
LRPC
SRPC
Long-Run Equilibrium
(?)
Transcribed Image Text:Which of the following is true as a result of the two changes in aggregate demand and
aggregate supply? (Note: Do not consider the magnitudes of the shifts given on the
preceding graphs. Think only about the directions of the shifts.) Check all that apply.
The effect on the inflation rate will be ambiguous.
The effect on unemployment will be ambiguous.
The price level will rise.
Equilibrium output will fall.
Suppose the Fed responds quickly to these shocks and adjusts monetary policy to keep
unemployment and output at their natural rates.
On each of the previous graphs, adjust the curve or curves (if necessary) to show the long-
run results, and place a black point (plus symbol) on the point representing the new long-run
equilibrium.
True or False: If the Fed takes the course of action you selected, the inflation rate will fall.
True
False
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