Andalucia experiences severe storms which destroys its main resource, oil rigs. Assume that the Andalucian economy...

Andalucia experiences severe storms which destroys its main resource, oil rigs. Assume that the Andalucian economy was in long-run equilibrium before this shock happens.

a. Use the aggregate demand–aggregate supply model to illustrate graphically the short-run and long-run impact of this supply shock on output and prices. In other word how does the economy get back to long run? Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the terminal equilibrium values. State in words what happens to prices and output as a combined result of the supply shock, both in the short run and long run. What happens to unemployment rate in the short run and in the long run?

b. If the Central Bank of Andalucia attempted to offset this deviation from the natural rate in the short run, should the money supply be increased or decreased? Show this action in the same graph and label the shifts. Which curve shifts? Does it shift to the right or left? What happens to output and prices as a result? What happens to unemployment rate? Explain.

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

A country experiences severe storms which destroys its main resource, oil rigs. Assume that the countries...

A country experiences severe storms which destroys its main resource, oil rigs. Assume that the countries economy was in long-run equilibrium before this shock happens. Use the aggregate demand–aggregate supply model to illustrate graphically the short-run and long-run impact of this supply shock on output and prices. In other word how does the economy get back to long run? Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift;...

Oil is a resource used by many manufacturers. Which graph illustrates the effects of a hurricane that destroys most of the nation's oil refining capabilities?

An economy on the balanced growth path experiences a natural disaster. A hurricane destroys 50% of...

An economy on the balanced growth path experiences a natural disaster. A hurricane destroys 50% of the economy’s population and 75% of its capital stock. Show the path of the following variables (Note: your answer should consist of a graph of a variable or the log of a variable on the vertical axis, and time on the horizontal axis) and explain the changes over time to the following variables. A) Capital and production per worker (k and y) B) Employment...

Assume that a hypothetical economy with an MPC of 0.9 is experiencing severe recession. Instructions: In...

Assume that a hypothetical economy with an MPC of 0.9 is experiencing severe recession. Instructions: In part a, round your answers to 2 decimal places. Enter positive numbers. In part b, enter your answers as whole numbers. a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $40 billion? $ billion. How large a tax cut would be needed to achieve the same increase in aggregate demand? $ billion. b. Determine one...

Assume that a hypothetical economy with an MPC of 0.8 is experiencing severe recession. By how...

Assume that a hypothetical economy with an MPC of 0.8 is experiencing severe recession. By how much would government spending have to rise to shift the aggregate demand curve rightward by $40 billion? How large a tax cut would be needed to achieve the same increase in aggregate demand? Determine one possible combination of government spending increases and tax increases that would accomplish the same goal without changing the amount of outstanding debt (i.e., maintaining the budget balance at its...

Assume that a hypothetical economy with an MPC of 0.8 is experiencing severe recession. Instructions: In...

Assume that a hypothetical economy with an MPC of 0.8 is experiencing severe recession. Instructions: In part a, round your answers to 2 decimal places. Enter your answers as positive numbers. In part b, enter your answers as whole numbers. a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $30 billion? How large a tax cut would be needed to achieve the same increase in aggregate demand? b. Determine one possible...

Assume that the economy has just come out of a severe recession, and growth is booming....

Assume that the economy has just come out of a severe recession, and growth is booming. The labor force is growing because many unemployed people who thought they could not find a job during the recession now think they can and have started to apply for work. But, not all of these people find a job immediately. What do you think will happen to the unemployment rate this month?

Assume that an economy experiences an adverse supply shock that causes stagflation (simultaneous decrease in output...

Assume that an economy experiences an adverse supply shock that causes stagflation (simultaneous decrease in output (increase in unemployment) and increase in prices). In your opinion, should the government use expansionary or contractionary fiscal policy to address the situation? Explain your answer, mentioning the tradeoffs that each of the policies involves?

1. Consider a two period model in which a scare resource (say, oil) is allocated competitively....

1. Consider a two period model in which a scare resource (say, oil) is allocated competitively. The demand curve in both periods is given by ?? = 100 − ?? where ? = 1,2 represents the two periods. Let the unit extraction cost be $12 per barrel. Take the discount rate to be 5%. (a) What is the threshold stock of barrels beyond which oil is no longer scare? (b) Now suppose you are given 100 barrels of oil to...

Which of the following is not a main function of the entrepreneur? to assume the risk...

Which of the following is not a main function of the entrepreneur? to assume the risk of economic losses to make strategic business decisions to innovate to make routine pricing decisions

Subjects