Now suppose that droughts in the Southeast and floods in the Midwest substan- tially reduce food production in the United States. Suppose you are an economist working for the Federal Reserve. d. Use the aggregate demand–aggregate supply model to illustrate graphically the im- pact in the short run and the long run of this adverse supply shock. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.
Now suppose that droughts in the Southeast and floods in the Midwest substan-
tially reduce food production in the United States. Suppose you are an economist
working for the Federal Reserve.
d. Use the aggregate demand–
pact in the short run and the long run of this adverse supply shock. Be sure to label:
i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves
shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values.
State in words what happens to prices and output in the short run and the long run.
e. Use the aggregate demand–aggregate supply model to illustrate graphically your pol-
icy recommendation to accommodate this adverse supply shock, assuming that your
top priority is maintaining full employment in the economy.
f. Would you recommend the same policy if your top priority was maintaining the price
stability? Why?
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