Assume that Hippoland is in Long-run Equilibrium in in 2019. Illustrate the situation in a graph...

Assume that Hippoland is in Long-run Equilibrium in in 2019.

Illustrate the situation in a graph below. What is Y0 and P0?
Suppose Hippoland experiences an adverse short-run aggregate supply in 2020. The Central Bank does not engage in expansionary policy nor is there an increase in government expenditures or a cut in taxes. What happens to the short-run macroeconomic equilibrium? Illustrate what happens in the graph from part a. What is Y1 and P1?
Explain what happens to GDP, unemployment, and the price level compared with 2019.
Assuming there are no policy changes or expected policy changes in 2021. Explain what happens to GDP, unemployment, and the price level? Show the effect graphically? What is Y2 and P2?

Assume that Hippoland is in Long-run Equilibrium in in 2019.

Illustrate the situation in a graph below. What is Y0 and P0?
Suppose that firms and workers in Hippoland expect oil and commodity prices are to fall in 2020. What happens to the short-run macroeconomic equilibrium? The Central Bank does not engage in expansionary policy nor is there an increase in government expenditures or a cut in taxes. Illustrate what happens in the graph from part a. What is Y1 and P1?
Explain what happened to GDP, unemployment, and the price level in 2020 compared with 2019.
Assuming there are no policy changes or expected policy changes in 2021. Explain what happens to GDP, unemployment, and the price level? Show the effect graphically? What is Y2 and P2?

What are the four functions of money? Provide examples of money. Are there things which can be considered money, if they do not fulfill all four functions? Give examples.

Solutions

Expert Solution

(a)

In following graph, initial long-run equilibrium is at point A where AD0 (aggregate demand), LRAS0 (long-run aggregate supply) and SRAS0 (short-run aggregate supply) curves intersect, with initial long-run equilibrium price level P0 and initial real GDP (equal to Potential GDP) Y0.

(b)

An adverse supply shock will decrease aggregate supply in short run. SRAS curve will shift to left, increasing price level and decreasing real GDP, causing a stagflation in short run. In above graph, SRAS0 will shift leftward to SRAS1, intersecting AD0 at point B with higher price level P1 and lower real GDP Y1.

(c)

Compared to in 2019, after the adverse supply shock, real GDP will be lower, unemployment will be higher and price level will be higher in 2020.

(d)

In absence of intervention, prices and wages will adjust in long run, therefore aggregate demand will increase, shifting AD curve rightward, intersecting new SRAS curve at a further higher price level but restoring real GDP to potential GDP level. Unemployment rate will decrease compared to in short run equilibrium, and will be restored at natural rate of unemployment. In above graph, AD0 will shift rightward to AD1, intersecting SRAS1 at point C with further higher price level P2 and restoring real GDP to potential GDP of Y0 (which is equal to Y2).

NOTE: As per Answering Policy, 1st 4 parts are answered.

Rahul Sunny answered 1 year ago

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