Question

Use the following for questions 3, 4, 5, and 6. Suppose that a new pipeline is proposed that will allow crude oil to be transported across the country to refineries more efficiently than current pipelines. This increase in efficiency will eventually result in a decrease in the price of refined gasoline (used in automobiles) in the long-run. However, current regulatory issues have caused concern and shut down the existing pipelines. We can model this as a temporary shock to gasoline prices (temporary price shock).

3. Using our AD/AS framework, what would happen to GDP, inflation, and unemployment in the short-run?

a. In the short-run, GDP would increase.

b. In the short-run, GDP would decrease.

c. In the short-run, GDP would stay the same.

d. In the short-run, inflation would increase.

e. In the short-run, inflation would decrease.

f. In the short-run, inflation would stay the same.

g. In the short-run, unemployment would increase.

h. In the short-run, unemployment would decrease.

i. In the short-run, unemployment would stay the same.

4. What would happen in the long-run if there is no policy response?

a. In the long-run, GDP will return to the natural rate level of output, unemployment will return to the natural rate, and inflation will return to the original level because the self-correcting mechanism will shift the SRAS back to the original equilibrium.

b. In the long-run, GDP will return to the natural rate level of output, unemployment will be greater than the natural rate, and inflation will return to the original level because the self-correcting mechanism will shift the SRAS back to the original equilibrium.

c. In the long-run, GDP will return to the natural rate level of output, unemployment will return to the natural rate, and inflation will return to the original level because the self-correcting mechanism will shift the AD back to the original equilibrium.

d. In the long-run, GDP will return to the natural rate level of output, unemployment will return to the natural rate, and inflation will be permanently higher because the self-correcting mechanism will shift the AD curve to the right.

5. Suppose the Federal Reserve wanted to stabilize the inflation rate in the short-run. Would they need to increase or decrease the money supply? _________

a. If the Fed took the action you suggest, the unemployment rate would ______.

b. If the Fed took the action you suggest, short-run output would ______.

6. Suppose the Federal Reserve wanted to stabilize the unemployment rate in the short-run. Would they need to increase or decrease the money supply? __________

a. If the Fed took the action you suggest, the inflation rate would ______.

b. If the Fed took the action you suggest, output would ______ relative to the level before the policy action.

Answer 1