Question

Consider a positive supply shock, i.e. a sharp decrease in energy prices. Show how the economy adjust to the Medium-Run equilibrium, and discuss how the FED determines the policy rate. Use the IS-LM-PC model to graph your answer.

Answer 1

Consider a positive supply shock, i.e. a sharp decrease in energy prices. Show how the economy adjust to the Medium-Run equilibrium, and discuss how the FED determines the policy rate. Use the IS-LM-PC model to graph your answer.

After the positive supply shock supply curve shift and in the below diagram supply curve shift from SRAS to SRAS1 and which leads to decrease in price also price decrease and output increases and productivity increases with decrease in wage. From Phillips curve as there is shift in supply so short run Phillips curve shifted from SRPC to SRPC1 and which will decreases the inflation and natural rate of unemployment will not change. Diagram explain below

Phillips curve define below it is the situation due to positive supply shock diagram given below

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