The following graph shows the aggregate demand curve (ADAD), the short-run aggregate supply curve (ASAS), and the long-run aggregate supply curve (LRASLRAS) for a hypothetical economy. Initially, the expected price level equals the actual price level, and the economy experiences long-run equilibrium at a natural level of output of $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.   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.   The short-run economic outcome resulting from the increase in production costs is known as  (hyperinflation/stagflation/monetary neutrality/deflation) .   Suppose now that the government decides not to take any action in response to the short-run impact of the higher oil prices.   In the long run, given that the government does nothing, the output level in the economy will equal $___________ billion and the price level will equal $_____________.

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question

The following graph shows the aggregate demand curve (ADAD), the short-run aggregate supply curve (ASAS), and the long-run aggregate supply curve (LRASLRAS) for a hypothetical economy. Initially, the expected price level equals the actual price level, and the economy experiences long-run equilibrium at a natural level of output of $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.
 
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.
 
The short-run economic outcome resulting from the increase in production costs is known as  (hyperinflation/stagflation/monetary neutrality/deflation) .
 
Suppose now that the government decides not to take any action in response to the short-run impact of the higher oil prices.
 
In the long run, given that the government does nothing, the output level in the economy will equal $___________ billion and the price level will equal $_____________.
Hint: For simplicity, ignore any possible impact of the higher oil prices on the natural level of output.
140
LRAS
135
130
125
120
H
115
110
105
110
115
PRICE LEVEL
100
100
105
120
125
OUTPUT (Billions of dollars)
AS
AD
130
135
140
AD
AS
LRAS
?
Transcribed Image Text:Hint: For simplicity, ignore any possible impact of the higher oil prices on the natural level of output. 140 LRAS 135 130 125 120 H 115 110 105 110 115 PRICE LEVEL 100 100 105 120 125 OUTPUT (Billions of dollars) AS AD 130 135 140 AD AS LRAS ?
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps with 1 images

Blurred answer
Knowledge Booster
Productivity
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education