The following graph shows the aggregate demand curve (ADAD), the short-run aggregate supply curve (ASAS), and the long-run aggregate supply curve (LRASLRAS) 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. The short-run economic outcome resulting from the increase in production costs is known as (hyperinflation/stagflation/monetary neutrality/deflation) . 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 $___.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The following graph shows the aggregate demand curve (ADAD), the short-run aggregate supply curve (ASAS), and the long-run aggregate supply curve (LRASLRAS) 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.

The short-run economic outcome resulting from the increase in production costs is known as (hyperinflation/stagflation/monetary neutrality/deflation) .

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 $_____________.

Hint: For simplicity, ignore any possible impact of the higher oil prices on the natural level of output.
140
LRAS
135
130
125
120
H
115
110
105
110
115
PRICE LEVEL
100
100
105
120
125
OUTPUT (Billions of dollars)
AS
AD
130
135
140
AD
AS
LRAS
?

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