Question

This Question: 1 pt 11 of 30 This In the graph on the right the economy is in long-run equilibrium at point A Now, assume that there is an unexpected increase in the price of oil. 1) Use the line drawing tool to show the resulting short-run equilibrium on your diagram. Label any new aggregate demand or aggregate supply curve as AD, SRAS, LRAS, p riate 2.) Use the point drawing tool to locate the new short run equilibrium point Label this point Carefully follow the instructions above, and only draw the required objects In the new short-un equilibrium, the unemployment rates the unemployment rate in the initia l ibrium prior to the create in the price of oil Which of the following best explains how and why the econ w orth long run quibu? 2009100) ODPD OA Short-run aggregate supply wil decrease ishte quals e poly wil decreases hesadust to the new higher price Price O Aggregate demand will decrease restoring the ongelu m proe and quantity O Aggregate demand will increase restoring the original rum price and OD Shortunggregate supply wil re g ards the recension m ums and we wiling to Mh the intaggregate welcomplete the economy turns to OAB. O wa power than OG between points A the A dB Click the graph, choose a tool in the palette and follow the structions to create your

Answer 1

SRAS2 LRASI SRASI Price level (GDP Deflator 2009=100 ADI Real GDP (Trillions of 2009 dollars) In the new shortrun equilibrium, the unemployment rate is higher than the unemployment rate in the initial equilibrium prior to the increase in the price of oil. Answer: D. Shortrun aggregate supply will increase (shift rightward) as the recession makes firms and worker willing to accept a lower wages and prices. Answer: D. At point A. Answer: C. real GDP, the unemployment rate and the price level will be the same as the initial equilibrium value prior to the increase in the price of oil. Explanation 1. The increase in oil price is a negative supply shock. In shortrun the aggregate supply curve shift to the left from SRASI to SRAS2. The supply decreases because when the cost increases the profit of the firm decrease. 2. The new shortrun cquilibrium point is the intersection of AD and SRAS2. The new shortrun equilibrium point is B. 3. At the new equilibrium point B the unemployment rate is higher than the initial equilibrium point A. 4. The increase in price reduces the aggregate demand and creates unemployment. Then the workers will be ready to accept lower wage. As the wage falls the aggregate supply curve shift to the right. As the supply increase the price decrease and employment increase. 5. Aggregate supply increase till the economy reaches to the initial cquilibrium at 6. The economy reaches to the initial GDP, price level and unemployment as it was at point A. All will be same as prior to the increase in oil price.