Suppose that the oil price sharply increased for a while, which increased production costs, causing an adverse supply shock.Use the AD-AS model to show the effects on output and the price level in both the short- run and long-run.Show the adjustment process of the economy from the short-run to the long-run.What is the effect on unemployment in short-run and long-run?Can policymakers do something to accommodate this shock? Would the outcome be different in this case?

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Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter11: Fiscal Policy: The Keynesian View And Historical Development Of Macroeconomics

Section: Chapter Questions

Problem 9CQ

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Suppose that the oil price sharply increased for a while, which increased production costs, causing an adverse supply shock.

1. Use the AD-AS model to show the effects on output and the price level in both the short- run and long-run.
2. Show the adjustment process of the economy from the short-run to the long-run.
3. What is the effect on unemployment in short-run and long-run?
4. Can policymakers do something to accommodate this shock? Would the outcome be different in this case?

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