For Shock C: Suppose the economy starts in the long run equilibrium. Illustrate changes that the shock will cause in the short run (using AD-SRAS). Explain why each curve shifts. Determine how the price level and output will be affected in the short run. Mark the output gap on the diagram. Is the output gap positive or negative? Is the economy is booming, or is it in a recession? On the same diagram illustrate how the economy will adjust to the shock in the long run and explain the mechanism. Determine how the price level and output will be affected in the long run. C. Firms expect an economic boom in the coming years As a result of this shock, in the short run the (SRAS Curve/AD Curve) will shift?In consequence, in the short run prices and output will?In the short run, there will be a ? (negative/postive) output gap,which means there will be a ? (boom/recession)As time passes, because of high unemployment the wages in the economy will? (decrease/increase)As a result, the SRAS curve will shift ? (right/left), causing the price level to ? (increase/fall) and output to eventually return to its long run level Y*.

In the long run, economy always reverts back to its potential GDP.

Answered: For Shock C: Suppose the economy…

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter22: Aggregate Demand And Aggregate Supply

Section: Chapter Questions

Problem 4P

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For Shock C:

Suppose the economy starts in the long run equilibrium. Illustrate changes that the shock will cause in the short run (using AD-SRAS). Explain why each curve shifts.
Determine how the price level and output will be affected in the short run.
Mark the output gap on the diagram. Is the output gap positive or negative? Is the economy is booming, or is it in a recession?
On the same diagram illustrate how the economy will adjust to the shock in the long run and explain the mechanism.
Determine how the price level and output will be affected in the long run.

C. Firms expect an economic boom in the coming years

As a result of this shock, in the short run the (SRAS Curve/AD Curve) will shift?

In consequence, in the short run prices and output will?

In the short run, there will be a ? (negative/postive) output gap,which means there will be a ? (boom/recession)

As time passes, because of high unemployment the wages in the economy will? (decrease/increase)

As a result, the SRAS curve will shift ? (right/left), causing the price level to ? (increase/fall) and output to eventually return to its long run level Y*.

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