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Chapter 11: Q. 8 (page 251)

Based on your answers to Problems 11-6and 11-7, can policymakers stabilize both the price level and real GDPsimultaneously in response to a short-lived but sudden rise in oil prices? Explain briefly.

Short Answer

Expert verified

Oil prices have risen sharply as a result of officials expanding the money supply to avert a quick collapse in real GDP. As a result, aggregate demand will lurch to the right.

Step by step solution

01

Step: 1 Policymakers:

Policymakers are unable to stabilise both market rate and growth level at the very same time in response to a near-term but significant rise in oil prices because they will expand the monetary base to avert a relatively brief reduction in real GDP. As a result, aggregate demand will lurch to the right.

02

Step: 2 Sudden rise in oil price:

As a result, consumers want to spend more money on items, which encourages businesses to manufacture more, resulting in higher in pricing. Workers also demand higher pay in order to create more production and compensate for rising prices, so the aggregate supply curve shifts to the left in the short run.

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Most popular questions from this chapter

In Figure 11-2, if planned saving was less than planned investment, what would be true of the interest rate in relation to its equilibrium value? How would the interest rate adjust?

Explain what factors cause shifts in the shortrun and long-run aggregate supply curves

Consider Figure 11-3. Will all people who desire to work be employed if the current wage rate is $28per hour? How many people will be employed and unemployed at this wage rate?

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

For each question that follows, suppose that the economy begins at point A. Identify which of the other points on the diagram-point B, C, D, or E-could represent a new short-run equilibrium after the described events take place and move the economy away from point A. Briefly explain your answers.

a. Most workers in this nation's economy are union members, and unions have successfully negotiated large wage boosts. At the same time, economic conditions suddenly worsen abroad, reducing real GDP and disposable income in other nations of the world.

b. A major hurricane has caused short-term halts in production at many firms and created major bottlenecks in the distribution of goods and services that had been produced prior to the storm. At the same time, the nation's central bank has significantly pushed up the rate of growth of the nation's money supply.

c. A strengthening of the value of this nation's currency in terms of other countries' currencies affects both the SRAS curve and the AD curve.
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