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8. Problems and Applications Q8 As described in the chapter, the Federal Reserve in 2008 faced a decrease in aggregate demand caused by the housing

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8. Problems and Applications Q8 As described in the chapter, the Federal Reserve in 2008 faced a decrease in aggregate demand caused by the housing and financial crises and a decrease in short-run aggregate supply caused by rising commodity prices. Starting from & long-run equilibrium, illustrate the effects of these two changes on aggregate supply and aggregate demand on the following graph. Then, an the subsequent graph, indicate what happens on a Phillips-curve diagram. LRAS O Aggregate Supply Aggregate Demand Aggregate Supply Price Level A LRAS Aggregate Demand Long-Run Equilibrium Quantity of Output\fWhich of the following is true as a result of the two changes in aggregate demand and aggregate supply? {(Note: Do not consider the magnitudes of the shifts given on the preceding graphs. Think only about the directions of the shifts.) Check all that apply. [ Equilibrium output will rise. [ unemployment will rise. The effect on the inflation rate will be ambiguous. The price level will fall. Suppose the Fed responds guickly to these shocks and adjusts monetary policy to keep unemployment and output at their natural rates. On each of the previous graphs, adjust the curve or curves (if necessary) to show the long-run results, and place a black point (plus symbol) on the point representing the new long-run equilibrium. Note: The first graph will be modified to reflect the monetary policy adjustment which might differ than your original manipulation of the graph. True or False: In these situations, the Fed might choose not to take the course of action you selected because it would lead to a rise in the inflation rate. ) True O False

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