Question

Suppose the economy portrayed by the figure to the right simultaneously experiences the cost shock of higher oil prices and a national security related surge in defense expenditures. ASO Manipulate both curves to derive the impact on the price level of these combined events. NOTE: Shifts in AD require the line drawing tool while the three-point curved line drawing tool is used to shift AS. Properly label your new line and curve. o Price level, P Note: Carefully follow the instructions above and only draw the required objects. According to your graph, the price level ADO O A. will unambiguously rise. O B. rises due to price-gouging by oil companies and defense contractors. O c. may rise or fall, depending on which shift is larger. OD. rises only if the AD shift is smaller than the AS shift. FO Aggregate output (income), Y

Answer 1

A surge in defense spending is a part of fiscal expansion that raises aggregate spending. AD would shift to the right as a result. This raises price level and GDP

A surge in oil prices will be an adverse supply shock that reduces production. AS would shift left and this would raise the price but GDP will be reduced.

Overall, Price level rises unambiguously but GDP change in uncertain.

Select option A

ASO Po AS1 AD1 ADo Aggregate output (încome), Y Price level, P