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Chapter 11: Q. 6 (page 251)

Suppose that there is a temporary, but significant, increase in oil prices in an economy with an upward-sloping SRAS curve. If policymakers wish to prevent the equilibrium price level from changing in response to the oil price increase, should they increase or decrease the quantity of money in circulation? Why?

Short Answer

Expert verified

If policymakers want to avoid a change in the optimal price level in reaction to an increase in oil prices, they should reduce the amount of money in circulation.

Step by step solution

01

Step: 1 Equilibrium price:

In an organization with a skyward short-run aggregate supply curve, there is a momentary but considerable shift. If policymakers want to avoid a change in the optimal price level in reaction to an increase in oil prices, they should reduce the amount of money in circulation.

02

Step: 2 Conclusion:

From the above dicussion,so that

- As the money supply expands, individuals would have more wealth and want to spend it on more things, shifting the overall rightward.

- Because businesses must hire more employees, wages must rise, resulting in higher in cost and, as a result, price.

- As a result, employees demand higher wages in order to create more production and compensate for rising prices; as a result, the aggregate supply curve shifts to the left in the short run.

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Most popular questions from this chapter

Between early 2005and late 2007, total planned expenditures by U.S. households substantially increased in response to an increase in the quantity of money in circulation. Explain, from a short-run Keynesian perspective, the predicted effects of this event on the equilibrium U.Sprice level and equilibrium U.S. realGDP. Be sure to discuss the spending gap that the Keynesian model indicates would result in the short run.

Between carly 2008 and the beginning of 2009 , a gradual stock-market downturn and plummeting home prices generated a substantial reduction in U.S. household wealth that induced most U.S. residents to reduce their planned real spending at any given price level. Explain, from a short-run Keynesian perspective, the predicted effects of this event on the equilibrium U.S. price level and equilibrium U.S. real GDP. Be sure to discuss the spending gap that the Keynesian model indicates would result in the short run.

Consider a country whose economic structure matches the assumptions of the classical model. After reading a recent best-seller documenting a growing population of low-income elderly people who were ill prepared for retirement, most residents of this country decide to increase their saving at any given interest rate. Explain whether or how this could affect the following:

a The current equilibrium interest rate

b Current equilibrium real GDP

c Current equilibrium employment

d Current equilibrium investment

e Future equilibrium real GDP

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