Assume that the economy is at a long-run equilibrium, with unemployment at 5%, and inflation at...

 

Transcribed Image Text:

Assume that the economy is at a long-run equilibrium, with unemployment at 5%, and inflation at 2% pa. Imagine a war breaks out in the Middle East, causing a very large increase in the price of crude oil. Assume that Ireland imports large amounts of oil. (a) What is the name given to this type of economic shock? (b) The shock causes unemployment to rise to 9%, and inflation to rise to 4% pa. Using an AD/AS diagram and a Phillips curve diagram, illustrate and explain the short-run effects of this shock on the Irish economy. [assume the price level is not sticky, ß = 0.5, v = 4%] (c) Using the data, write out the equation of the Phillips curve before and after the shock. (d) Using a new AD/AS diagram and a new Phillips curve diagram, illustrate and explain how the economy might return to its long-run equilibrium Assume that the economy is at a long-run equilibrium, with unemployment at 5%, and inflation at 2% pa. Imagine a war breaks out in the Middle East, causing a very large increase in the price of crude oil. Assume that Ireland imports large amounts of oil. (a) What is the name given to this type of economic shock? (b) The shock causes unemployment to rise to 9%, and inflation to rise to 4% pa. Using an AD/AS diagram and a Phillips curve diagram, illustrate and explain the short-run effects of this shock on the Irish economy. [assume the price level is not sticky, ß = 0.5, v = 4%] (c) Using the data, write out the equation of the Phillips curve before and after the shock. (d) Using a new AD/AS diagram and a new Phillips curve diagram, illustrate and explain how the economy might return to its long-run equilibrium

Answer rating: 100% (QA)

1 A economics shock is one that affects the general economy due to extremely interconnected nature o... View the full answer