Question

Use the following information to work Problems 4 and 5. In China, the price of imported natural gas that is heavily used in local production fluctuates frequently. This causes China’s short-run macroeconomic equilibrium to fluctuate. Someone suggested that the government raise transfer payments when the price of natural gas rises in a way that counters the decrease in the macroeconomic equilibrium.

4. How would such an action influence aggregate demand?

5. How would such an action influence aggregate supply and macroeconomic equilibrium?

7. Suppose that the world price of oil rises. On an AS-AD graph, show the effect of the world oil price rise on US macroeconomic equilibrium in the short run. Explain the adjustment process that restores the economy to full employment.

Answer 1

Question: in China price of imported natural gas that is heavly used in local production fluctuate frequently. This Cause china short run macroeconomics eqlibrium to fluctuate. Some suggested government raise transfer payment .

When the price of natural gas raises in a way that counter the decrease in the macroeconomics equilibrium

a) how would such an action influence AD?

Answer: as there is increase in transfer payments it will increase the consumption of individuals and the AD curve shift rightward also price of natural gas increases which will leads to decrease in AD and AD curve shift legtward there will be no effect on equilibrium

Question 7: suppose that world oil price of oil rises. On an AD AS curve, show the effect of world price rise on US economy macroeconomic equilibrium in the short run, explain the adjustment that restore the US economy to full employment.

Answer: in the short run there is trade off between inflation and unemployment as price increases then this will create inflation which will leader to decrease in unemployment from the short run and long run Phillips curve we can understand the concept as follows here in long run there is no trade off between inflation And unemployment