Hey Guys! I am having some trouble with my econ homework and was hoping someone
ID: 1199917 • Letter: H
Question
Hey Guys! I am having some trouble with my econ homework and was hoping someone could help me out!
Thanks in advance!
9. Economic fluctuations II The following graph shows the short-run aggregate supply curve (AS), the aggregate demand curve (AD), and the long-run aggregate supply curve (LRAS) for a hypothetical economy. Initially, the expected price level is equal to the actual price level, and the economy is in long-run equilibrium at its natural rate of output, $110 billion. Suppose a bout of severe weather drives up agricultural costs, increases the costs of transporting goods and services, and increases the costs of producing goods and services in this economy. Use the graph to help you answer the questions about the short-run and long-run effects of the increase in production costs that follow. (Note: You will not be graded on any adjustments made to the graph.) Hint: For simplicity, ignore any possible impact of the severe weather on the natural rate of output.Explanation / Answer
1. Adverse supply shock.
With an adverse supply shock, the cost of production increases and the short-run supply curve shifts to the left, because of higher costs, the firms produce lesser output.
2. $110 and 110 units of output.
Given that the natural rate of output does not change after a supply shock, it implies that the shock is temporary in nature and the aggregate supply curve, in the long run would return to its normal leve and the equilibrium would be restored.