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?