Answered step by step
Verified Expert Solution
Question
00
1 Approved Answer
2. A new discovery of vast oil reserves off the Atlantic Coast which causes oil prices to decrease dramatically is an example of a positive
2. A new discovery of vast oil reserves off the Atlantic Coast which causes oil prices to decrease dramatically is an example of a positive supply shock. a. Starting from an initial long-runfshort-run equilibrium illustrate the shortrun effect of the positive supply shock using the ASIAD graph. Be sure to label all your curves and axes. Label the initial equilibrium as Point A and the new short-run equilibrium as Point B. b. If there are no other changes in economic policy, what effect will a positive supply shock have on output and the price level in the short-run? c. If, on the other hand, the Federal Reserve wishes to keep output from changing, what policy could the Federal Reserve adopt to respond to the discovery of new oil reserves? Illustrate this policy in your graph from Part (a). Label the new resulting equilibrium as Point C. What is the drawback of the Federal Reserve taking action to respond to an adverse supply shock? 3. Suppose the components of the Aggregate Expenditure as follows: Y = C + I + G + NX C = 475 + 0.7fYT} l=950 G=750 EX=400 IM= 4T8. T=T50 a. Is the government currently running a balanced budget, a budget decit or a budget surplus? Explain. b. Calculate the equilibrium income. c. Graphically illustrate, using the Keynesian Cross Diagram, the eect of an increase in government spending on equilibrium output
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started