Suppose that the oil price sharply increased for a while, which increase.Can policymakers do something to accommodate this shock? Would the outcome Suppose that the oil price sharply increased for a while, which increased production costs, causing an adverse supply shock. Can policymakers do something to accommodate this shock? Would the outcome be different in this case

Suppose that the oil price sharply increased for a while, which increase.Can policymakers do something to accommodate this shock? Would the outcome Suppose that the oil price sharply increased for a while, which increased production costs, causing an adverse supply shock. Can policymakers do something to accommodate this shock? Would the outcome be different in this case

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter17: The Philips Curve And Expetactions Theory

Section: Chapter Questions

Problem 6SQP

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What are supply shocks? Why are policy choices hard when there are negative supply shocks? Would you model the pandemic of 2020 as a supply shock or a demand shock? Why?
Suppose that the oil price sharply increased for a while, which increased production costs, causing an adverse supply shock. A. Can policymakers do something to accommodate this shock? Would the outcome be different in this case?
What happened first was a major policy-induced supply shock. The lockdown forced firms in several directly affected sectors, from restaurants to hotels to airlines, to halt (or at least to drastically decrease) supply. In contrast to other supply shocks analyzed earlier in the book, many firms had no choice other than to stop or decrease production. As a result of sharply lower output, and thus lower income, and of increased uncertainty, this shock had a major effect on demand, not just in the sectors directly affected by the lockdown, but also in the non-affected sectors. Thus, the outcome was a combination of a supply shock and a sharp demand response. In that context, the role of macroeconomic policy was twofold. First: While it could not do much to increase output in the affected sectors, it needed to protect the firms in those sectors from going bankrupt and the workers who lost work from going hungry. Second: It needed to limit the effect of lower demand in the non-affected…
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