Question

V. For each of the following four events (a-d, below), explain the short-run effects on U.S. output and the price level, assuming policymakers take no action. Please use a separate graph to illustrate each answer. EACH written answer should address: 1) WHICH curve AD, SRAS and/or LRAS is affected. (No explanation required). ***2)WHY the curve shifts (which determinant is responsible) EXPLAIN fully. 20:83)HOW (increase or decrease) the event described affects AD and/or SRAS and/or LRAS. No explanation required. 4) What happens to output, employment and the price level in each instance in the short run (no explanation required here -just tell me whether each of the above have increased/decreased or stayed the same). Your graph should be labelled properly to show what happens to output and the price level. EVENTS: (a) The stock market declines sharply. (b) The U.S. launches a major offensive against ISIS in Syria and Iraq. (c) A technological improvement raises productivity. (d) Mexico experiences a major recession.

Answer 1

LRAS LAS SMASI SRAS -SRAS - AD' Output Output re 2 xf outbut LRAS LRAS RAS! (dj SRAS SLAS SRASI Mice frice land , i Lenel E AD 4 & Output AD! xt output x

Initial equilibrium in all the cases occurs at point E1 where aggregate demand curve, short run aggregate supply curve and long run aggregate supply curve of the economy intersects.

a. A decline in the stock market will reduce investment expenditure in the economy and thus shift the AD curve leftwards to AD' and at new short run equilibrium point E2, price level has decreased and national output has fallen which increases unemployment rate in the economy.

b. War will shift the SRAS curve leftwards to SRAS' and this will lead to increase in the price level and reduce the level of national output in the economy and thus unemployment rate in the economy increases.

c. Improvement in productivity will shift both the short run and long run aggregate supply curve of the economy rightwards and at new equilibrium point E2, price level has fallen and national output has increased reducing unemployment rate in the economy.

d. Recession in Mexico will reduce net exports of US and thus shift the Ad curve leftwards and thus both price level and output has fallen leading to increase in unemployment rate in the economy.