9. Economic fluctuations II The following graph shows the short-run aggregate su

Question

9. Economic fluctuations II The following graph shows the short-run aggregate supply curve (AS), the aggregate demand curve (AD), and the long-run aggregate supply curve (LRAS) for a hypothetical economy. Initially, the expected price level is equal to the actual price level, and the economy is in long-run equilibrium at its natural level of output, $120 billion Suppose war in the world's main oil-producing region sharply reduces the world oil supply, causing oil prices to rise and increasing the costs of producing goods and services in this economy Use the graph to help you answer the questions about the short-run and long-run effects of the increase in production costs that follow. (Note: You will not be graded on any adjustments made to the graph.) Hint: For simplicity, ignore any possible impact of the higher oil prices on the natural level of output. 140 LRAS 135 AS AD 130 125 AS LRAS 110 105 100 00 105 110 115 120 125 130 135 140 OUTPUT (Billions of dollars) The short-run economic outcome resulting from the increase in production costs is known as Now suppose that the government decides not to take any action in response to the short-run economic impact of the higher oil prices. In the long-run, when the government does nothing, the output in the economy will be billion billion and the price level will be

Explanation / Answer

When the oil prices in the world increase, the energy requirements are reduced and so aggregate supply curve shifts to the left. In the short run there will be higher prices as well as unemployment in the nation. This is typically known as a situation of stagflation.

Now if the government does not take any action the aggregate supply curve, output will return to its full employment level so long run output level will be 120 billion dollar and the price level is 120.

Related Questions

Navigate

• Browse (All)
• Browse 9
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.