10. Study the diagram below and answer the questions that follows. a. Give an example of...
10. Study the diagram below and answer the questions that follows. a. Give an example of the cause in leftward shift of the SRAS from SRAS1 to SRAS2.
- b. What happens to output, unemployment and prices at point B? Compare them with the economic circumstance at point A.
- c. The economic situation at point B is called?
- d. What polices do the fed need to take to bailout the economy from point B?
- e. With the aid of a diagram, illustrate the effect of your proposed policy from part (d) above.
Homework Answers
a) An increase in the wages or the price of crude oil increase would shift the SRAS to the left. It will increase the price and decrease the output in the market. (anything that increase the cost of production will shift the SRAS to the left.)
b) At point B as compared to point A, the output will decrease from Yn to Y2. as the output decrease the unemployment will rise and the price will rise too causing a stagflation in the economy.
c) Point B is called a Stagflation.
d) The Fed need to increase the money supply, that will increase the demand and shift the aggregate demand curve to the right. It will increase the output and demand bailing out the economy from the situation.
e) 
The Ad will shift the the right from AD1 to AD2 and it will increase the demand and take the economy out of recession but it will also increase the price to P'.
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