macro final, B. Aggregate supply and demand problems

Front

Aggregate Supply and Demand Problem

Use your knowledge of aggregate supply and demand analysis, In each case, analyze the impact of the following "shocks" on the nation's employment rate, real GDP, and price level. In addition, illustrate the impact of each "shock" using an aggregate supply and demand diagram. Finally,

analyze the policy options

available to the government to offset any harmful impact of these shocks.

Back

use the chart above to answer the following questions

(this is for information only questions on the next slides)

Front

A dramatic increase in oil prices;

Back

oil prices go up-> shift the AS into the left

causing:

price (up)

output (down)

employment (down)

inflation (up)

policy:

two step policy:

first contract AD to bring inflation down

next expand AD to bring output and employment up

Front

A collapse in stock and real estate prices;

Back

stock prices go down

real estate prices go down

=

a decline in wealth

shift the AD in and to the left

AD to the left =

prices (down)

output(down)

employment(down)

policy :

expand AD

to get the output and employment up

Front

a large increase in military spending;

Back

Military spending =

AD shifts to the right

AD to the right

=

output (up)

employment (up)

= inflation (up)

policy:

contract AD

to bring output, employment and inflation down

Front

business leaders become less certain and pessimistic about their future profits;

Back

Animal spirits go down

= investment spending falls

= AD goes in and to the left

AD goes to the left:

output (down)

employment (down)

price inflation (down)

(typical recession)

policy:

expand AD

Front

an appreciation of the dollar;

Back

export prices (up)

and import prices (down)

= AD shifts in and to the right

AD to the right

=

exports (down)

Imports (up)

policy:

no policy

Front

an economic boom in the rest of the world;

Back

economic boom in the rest of the world

= ROW output and employment goes (up)

= more ROW spending on us exports

= US exports (up)

=

AD shifts out and to the right

AD to the right (boom in US)

=

output (up)

employment (up)

prices (up)

policy:

no policy

Front

an open market purchase of bonds by the federal reserve;

Back

supply of money (up)

= borrowing for spending

= AD shifts to the right