m/al/servlet/quiz/quiz actions takeQuiz&quiz; probGuid-QNAPCOA801010000003b87eca
ID: 1108667 • Letter: M
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m/al/servlet/quiz/quiz actions takeQuiz&quiz; probGuid-QNAPCOA801010000003b87eca00700008ct gmcdonne-00678ck 4. Negative real shock Aa Aa The graph below shows the the long-run aggregate supply (LRAS) curve, the short-run aggregate supply curve (SRAS1), and the aggregate demand curve (AD1) for a hypothetical economy. The economy is currently at equilibrium at point 1, where the inflation rate is 4% and the rate of real growth is 2%. INFLATION RATE LRAS Curves 20 16 12 SRAS2 AD2 SRAS1 6 10 REAL GDP GROWTH RATE 1% -10 -6 -2 2 Suppose a negative real shock reduces productivity and shifts the LRAS curve to the left at-2%. The short-run aggregate supply curve moves along with the LRAS curve to SRAS2. To combat recession, the Federal Reserve increases the money growth rate and shifts the aggregate demand to AD2. Using the graph above, fill in the following table. Equilibrium Point Inflation Rate Real Growth Rate F1 F12Explanation / Answer
When Real Sock occurs, the SRAS shifts from SRAS 1 to SRAS2. BEefore Federal taking any corrective measure the demand curve was same as AD1. Hence just after the shock bute before the monetary exapnsion equilibrium occurred at intersection of SRAS2 and AD1. This intersecting equilibrium is represented by III. And at this equilibrium the corrsponding inflation rate is 8% and growth rate is -2%.
But when government chooses expansion monetary policy, the AD shifts upward from AD1 to AD2. Now equilibrium intersection takes place where LRAS2 and AD2 meet. This point is termed as II. And correpsonding inflation rate is 12% and grwoth rate is 0%.
As wee see that after monetary policy of expansion, inflation rises from 8% to 12% that is with a difference of 4% nd growth rate rises by 2% (from -2% to 0%). HEnce its true that with expansion policy inflation rises more than growth rate.
The followings are the problem in responding toa real shock:
Sticky wages and price amplify the real shock to shift sras even more farther.
Federal Reserve must access the situation.
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