Question

aw a S Using an aggregate demand and supply graph, show and describe the effects in both the short run and the long run of the following: 3. a. A temporary negative supply shock. b. A permanent negative supply shock

please help!

Answer 1

In the short run a temporary negative shock will shif the aggregate supply curve to the upward, causes an increase in the inflation and decrease in the output. But in the long run the economy will be back to its original position, with the output is less than the potential output the expected inflation declines so this now shifts the aggregate supply curve to the downward. So now the economy in is back to its original position. The shifts in the aggregate supply curve and the equilibrium is indicated by the arrows.

A. Temporary negative supply LRAS AS1 shock AS Inflation rate E1 P1 Lo AD Y1 Y Output

AS1 LRAS1 LRAS Inflation rate AS 削 P1 Lo AD Y1 Output

The effects of the permanent negative shock is graphed above, a negative supply shock would cause the short run aggregate supply curve shift to the upward and the long run aggregate supply curve shifts to the left. In the long run there would be permanent rise in the inflation and the decline in the output.