Suppose that environmental regulations require firms to reduce emissions and pollution during production. Firms then charge higher prices to cover the costs of compliance with the regulations. Suppose that new technology is used in the production of output now to reduce pollution and emissions at a much lower cost. This new technology decreases the cost of compliance with environmental regulations. a. Is the use of new technology a demand or a supply shock? Why? b. Use the aggregate demand-aggregate supply model to illustrate graphically and explain the impact in the short run and the long run of the 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. Explain in words what happens to prices and output in the short run and the long run.

Suppose that environmental regulations require firms to reduce emissions and pollution during production. Firms then charge higher prices to cover the costs of compliance with the regulations. Suppose that new technology is used in the production of output now to reduce pollution and emissions at a much lower cost. This new technology decreases the cost of compliance with environmental regulations. a. Is the use of new technology a demand or a supply shock? Why? b. Use the aggregate demand-aggregate supply model to illustrate graphically and explain the impact in the short run and the long run of the 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. Explain in words what happens to prices and output in the short run and the long run.

Principles of Economics, 7th Edition (MindTap Course List)

7th Edition

ISBN:9781285165875

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter33: Aggregate Demand And Aggregate Supply

Section: Chapter Questions

Problem 5PA

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