Aggregate demand and aggregate supply model applications

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Reference no: EM13831940

Aggregate Demand and Aggregate Supply Model Applications

a- Assume that the economy experiences a supply shock, such as an increase in energy prices. If the government tries to counter this cost shock (supply shock) by using expansionary fiscal policy/monetary policy, explain what will happen to the level of output (real GDP) and the price level in the economy, both in the short-run and in the long-run?

Draw the graph (manually) (5 points) and explain fully.

b- Given:

Unemployment Rate = 12%

Inflation Rate = zero

The economy is well below its potential output level.

What type of government policy would you recommend? Why?

c- Given:

Unemployment Rate = 5% and it is believed that 5% is the natural unemployment rate (target rate of unemployment).

Consumer optimism suggests that a large increase in consumer expenditures is likely.

What type of government policy would you recommend? Why?

Reference no: EM13831940

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