Use graphical analysis to show how each of the following would affect the econom
ID: 1159065 • Letter: U
Question
Use graphical analysis to show how each of the following would affect the economy first in the short run and then in the long run. Assume that the United States is initially operating at its full-employment level of output, that prices and wages are eventually flexible both upward and downward, and that there is no counteracting fiscal or monetary policy. Assume that point A is the long-run equilibrium starting point.
a. Because of a war abroad, the oil supply to the United States is disrupted, sending oil prices rocketing upward.
Instruction: Use the point tool aSR in the diagram above to locate the short run equilibrium that results from this shock.
The long run equilibrium will occur at point (A, B, or C)
b. Construction spending on new homes rises dramatically, greatly increasing total U.S. investment spending.
Instruction: Use the point tool bSR in the diagram above to locate the short run equilibrium that results from this shock.
The long run equilibrium will occur at point (A, B, or C)
c. Economic recession occurs abroad, significantly reducing foreign purchases of U.S. exports.
Instruction: Use the point tool cSR in the diagram above to locate the short run equilibrium that results from this shock.
The long run equilibrium will occur at point: (A, B, or C)
Explanation / Answer
Ans
It occurs at intersection of AS sr² and AD1
Longrun equilbrium is B because AD shifts as wages rise due to price increase
2 shortrun equilbrium occurs at intersection of AD3 and AS sr¹
Longrun equilbrium is again at B
3 It occurs at intersection of AD2 and AS sr¹.longrun equilbrium occurs at c
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