Question

5. (AD-AS model) a. Janet Yellen recently warned that Bitcoin investors stand to lose a significant amount of money if the market for the cryptocurrency crashes. Assume that the market does indeed crash and causes a drop in the wealth of the investors. Use the AD-AS model to discuss the predicted short- and long-run impacts on the inflation rate, real GDP and unemployment. Clearly label your graph and write a concise paragraph to accompany your graph. (5%) b. How should President Trump and Congress respond if they are concerned about the unemployment? Use an AD-AS diagram to support your discussion. (6%)

Answer 1

If Bitcoin investors are loosing their money, there would be less circulation of money and there would be decline in willingness to pay by consumers which leads to reduction in aggregate demand. It will result in fall in aggregate demand in economy which will shift the AD curve backward to AD1. It will result in fall in price level from P to P1 and fall in output level from Y to Y1 in short run.

In long run, producers will produce less of the goods to avoid inventories because of less demand. It will shift aggregate supply curve to its left from AS to AS1 which raise price to its initial level of P but reduce output level further to Y2.

A fall in output level in long run will reduce the labor required by producers which raise unemployment rate.

If Trump government and Congress is concerned about unemployment rate, they will implement expansionary fiscal or monetary policy in short run which will help in raising aggregate demand and prevent producers from reducing their aggregate supply. Raising aggregate demand will prevent output level from falling.