The following graph shows the aggregate demand curve (AD), the short-run aggregate supply curve (AS), and the long-run aggregate supply curve (LRAS) for a hypothetical economy. Initially, the expected price level equals the actual price level, and the economy experiences long-run equilibrium at a natural level of output of $120 billion. Suppose war in the world's main oil-producing region sharply reduces the world oil supply, causing oil prices to rise and increasing the costs of producing goods and services. Use the graph to help you answer the questions about the short-run and long-run effects of the increase in production costs that follow. (Note: You will not be graded on any adjustments made to the graph.) Hint: For simplicity, ignore any possible impact of the higher oil prices on the natural level of output. PRICE LEVEL 140 LRAS 135 130 125 120 115 110 105 AD ŏ AS AD 100 100 105 110 115 120 125 130 135 140 OUTPUT (Billions of dollars) AS LRAS (?) The short-run economic outcome resulting from the increase in production costs is known as stagflation Suppose now that the government decides not to take any action in response to the short-run impact of the higher oil prices. In the long run, given that the government does nothing, the output level in the economy will equal $ billion and the price level will equal
The following graph shows the aggregate demand curve (AD), the short-run aggregate supply curve (AS), and the long-run aggregate supply curve (LRAS) for a hypothetical economy. Initially, the expected price level equals the actual price level, and the economy experiences long-run equilibrium at a natural level of output of $120 billion. Suppose war in the world's main oil-producing region sharply reduces the world oil supply, causing oil prices to rise and increasing the costs of producing goods and services. Use the graph to help you answer the questions about the short-run and long-run effects of the increase in production costs that follow. (Note: You will not be graded on any adjustments made to the graph.) Hint: For simplicity, ignore any possible impact of the higher oil prices on the natural level of output. PRICE LEVEL 140 LRAS 135 130 125 120 115 110 105 AD ŏ AS AD 100 100 105 110 115 120 125 130 135 140 OUTPUT (Billions of dollars) AS LRAS (?) The short-run economic outcome resulting from the increase in production costs is known as stagflation Suppose now that the government decides not to take any action in response to the short-run impact of the higher oil prices. In the long run, given that the government does nothing, the output level in the economy will equal $ billion and the price level will equal
Chapter10: Aggregate Demand And Supply
Section: Chapter Questions
Problem 8SQP
Related questions
Question
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
Recommended textbooks for you
Economics (MindTap Course List)
Economics
ISBN:
9781337617383
Author:
Roger A. Arnold
Publisher:
Cengage Learning
Macroeconomics: Private and Public Choice (MindTa…
Economics
ISBN:
9781305506756
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning