Question 3: Consider an economy that is in equilibrium with output equal to Y *. There is then a significant reduction in the world's demand for this country's goods. (a) Illustrate the initial equilibrium in a diagram. (b) (b) What kind of shock occurred -aggregate demand or aggregate supply? Show the effect of the shock in your diagram. (c) (c) Explain the process by which the economy will adjust back toward Y in the long run. Show this in your diagram. (d) (d) Explain why policy makers may want to use a fiscal expansion to restore output back to Y * rather than wait for the process you described in part (c). What role does downward wage stickiness play in the policy- maker's thinking? | *
Question 3: Consider an economy that is in equilibrium with output equal to Y *. There is then a significant reduction in the world's demand for this country's goods. (a) Illustrate the initial equilibrium in a diagram. (b) (b) What kind of shock occurred -aggregate demand or aggregate supply? Show the effect of the shock in your diagram. (c) (c) Explain the process by which the economy will adjust back toward Y in the long run. Show this in your diagram. (d) (d) Explain why policy makers may want to use a fiscal expansion to restore output back to Y * rather than wait for the process you described in part (c). What role does downward wage stickiness play in the policy- maker's thinking? | *
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Question 3: Consider an economy that is in equilibrium with output equal to Y
*. There is then a significant reduction in the world's demand for this country's
goods.
(a) Illustrate the initial equilibrium in a diagram.
(b) (b) What kind of shock occurred -aggregate demand or aggregate supply?
Show the effect of the shock in your diagram.
(c) (c) Explain the process by which the economy will adjust back toward Y
in the long run. Show this in your diagram.
(d) (d) Explain why policy makers may want to use a fiscal expansion to
restore output back to Y * rather than wait for the process you described in
part (c). What role does downward wage stickiness play in the policy-
maker's thinking?
|
*
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