The following graph shows the short-run aggregate supply curve (AS), the aggregate demand curve (AD), and the long-run aggregate supply curve (LRAS) for a hypothetical economy. Initially, the expected price level is equal to the actual price level, and the economy is in long-run equilibrium at its natural level of output, $100 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 in this economy. 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 120 115 110 105 100 95 90 85 80 80 85 LRAS 90 95 100 105 OUTPUT (Billions of dollars) AS AD 110 115 120 AD AS LRAS (?) The short-run economic outcome resulting from the increase in production costs is known as Now suppose that the government immediately pursues an accommodative policy by increasing government purchases in response to the short-run economic impact of the higher oil prices. In the long run, when the government pursues accommodative policy, the output in the economy will be $ billion and the price level will be
The following graph shows the short-run aggregate supply curve (AS), the aggregate demand curve (AD), and the long-run aggregate supply curve (LRAS) for a hypothetical economy. Initially, the expected price level is equal to the actual price level, and the economy is in long-run equilibrium at its natural level of output, $100 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 in this economy. 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 120 115 110 105 100 95 90 85 80 80 85 LRAS 90 95 100 105 OUTPUT (Billions of dollars) AS AD 110 115 120 AD AS LRAS (?) The short-run economic outcome resulting from the increase in production costs is known as Now suppose that the government immediately pursues an accommodative policy by increasing government purchases in response to the short-run economic impact of the higher oil prices. In the long run, when the government pursues accommodative policy, the output in the economy will be $ billion and the price level will be
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:The following graph shows the short-run aggregate supply curve (AS), the aggregate demand
curve (AD), and the long-run aggregate supply curve (LRAS) for a hypothetical economy. Initially,
the expected price level is equal to the actual price level, and the economy is in long-run
equilibrium at its natural level of output, $100 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 in this economy.
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
120
115
110
105
100
95
90
85
80
80
85
LRAS
90
AS
AD
95 100 105 110
OUTPUT (Billions of dollars)
115
120
AD
AS
LRAS
(?)
The short-run economic outcome resulting from the increase in production costs is known as
Now suppose that the government immediately pursues an accommodative policy by increasing
government purchases in response to the short-run economic impact of the higher oil prices.
In the long run, when the government pursues accommodative policy, the output in the economy
will be $ billion and the price level will be
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