Average The following graph shows the short-run aggregate supply curve (As), the

Question

Average The following graph shows the short-run aggregate supply curve (As), the aggregate demand curve (AD), and the long-run aggregate supply curve (IRAs) 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, $100 billion. Suppose a bout of severe weather drives up agricultural costs, increases the costs of transporting goods and services, and increases 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 severe weather on the natural level of output. LRAS 115 80 100 05 110 115 10 The short-run economic outcome resulting from the increase in production costs is known as Now suppose that the government immediately pursues an accommodative policy by increasing government purchases in response to the short-run economic impact of the severe weather. In the long-run, when the government pursues accommodative policy, the output in the economy will bebillion billion and the price level will be

Explanation / Answer

The short-run economic outcome resulting from the increase in production costs is known as STAGFLATION

In the long run, when the government pursues accomodative policy, it will put upward pressure on prices and output rises.

  .

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

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