Question

4. How does the sudden hurricane that hit most states effect the U.S. economy? Be sure to outline the effects on U.S GDP, the price level and unemployment in the SR & LR. What policies should the government embark on to bailout the economy from the effects of the hurricane?

Answer 1

4.

The sudden hurricane in the USA, will give a negative supply shock to the US economy. It will happen due to loss of resources, disturbed medium of communication and restricted transportation. Due to the negative supply shock, the aggregate supply decreases and SRAS curve shifts to the left. It leads to the increase in price level, and decrease in real output or GDP level. Firms will start producing less and it will make they lay off some workers in the short run. So, unemployment rate increases in the short run. But, in the long run, unemployment rate does not change.

To bail out the economy from the severe effect of hurricane, the government should implement expansionary fiscal policy, where the government should do spending as well as offering tax benefits to the firms so that in one way AD increases, and another way, firms are encouraged to do some investment. It will push the economy towards the normalcy and towards the potential output level.