Question

In: Economics

Suppose that large number number of refugees flee from a civil war and arrive in our...

Suppose that large number number of refugees flee from a civil war and arrive in our country. Also suppose they are granted permanent resident status and are permitted to seek work.

Use ISLM + ASAD model to predict what will happen in the scenario above.

Indicate both the short run and long run. Label all clear starting and ending outcomes.

Solutions

Expert Solution

Let us assume that the economy is in long run equilibrium at full employment level as shown in the attached diagram.

If large number of refugees flee and are granted permanent residence in the domestic country, the short run effect of this change is that due to rise in the number of individuals in the economy, at every price level, the qauntity demanded will rise. This will shift the AD curve forward and will increase the income level in the economy and will lead to the rise in price level.

The rise in aggregate demand in the economy also implies that the IS curve will shift to the right. This is due to increased consumption in the economy. Thus, the new IS curve will intersect the LM curve at higher rate of interest and higher level of income.

Now, the rise in rate of interest will lead to crowding out effect in the economy. Also, when the output level increases beyond the potential level of income, it is the situation of more money chasing few goods which leads to inflation. This will movement on the aggregate demand curve in the backward direction. The supply curve will also shift backwards due tp inflation and decline in investment and eventually in the long run, the equilibrium is restored at the full employment level of output.

In the attached diagram, a= initial full employment equilibrium,

b= New short run equilibrium due to refugees.

c= New long run equilibrium.


Related Solutions

How did the Civil War change from a war to preserve the Union to a war...
How did the Civil War change from a war to preserve the Union to a war to end slavery?
From the end of the Civil War into the early twentieth-century, was Reconstruction a success or...
From the end of the Civil War into the early twentieth-century, was Reconstruction a success or a failure (or both) in its efforts to establish civil rights for African Americans?
The South was the problem." The tragedy of the Civil War era stemmed from the South's...
The South was the problem." The tragedy of the Civil War era stemmed from the South's "peculiar" relationship with the rest of the nation. Defend? Criticize?
What Primarily Caused the Civil War?
What Primarily Caused the Civil War?
2 paragraphs on the 1975 civil war in lebanon and the after effects of the war
2 paragraphs on the 1975 civil war in lebanon and the after effects of the war
Before the Civil War, the South was the wealthiest region in the country. After the war,...
Before the Civil War, the South was the wealthiest region in the country. After the war, it was the poorest, especially the cotton states of Georgia, Alabama, Mississippi, Louisiana and South Carolina. This poverty would remain characteristic of the region for more than a century. Discuss the reasons why the South fell into poverty and remained there for such a long time.
The Syrian Civil War: A Conspiracy of Competing Pipelines?
The Syrian Civil War: A Conspiracy of Competing Pipelines?
conclusion paragraph on lebanon and the civil war in 1975
conclusion paragraph on lebanon and the civil war in 1975
In the 1990’s, civil war erupted is Bosnia. The war led to the destruction of natural...
In the 1990’s, civil war erupted is Bosnia. The war led to the destruction of natural resources and capital and caused casualties that decreased the supply of the labor for the production of consumer goods and capital goods. Illustrate the impact of the war on Bosnia’s production possibilities curve for consumer goods and capital goods. In response to Iraq’s invasion of Kuwait in 1990, the United States and its allies imposed trade and financial sanctions on Iraq. Imports of Iraq...
The Civil War was a ruinous war for both North and South. Could it have been...
The Civil War was a ruinous war for both North and South. Could it have been avoided and if so how? If you think it could not have been avoided, why not?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT