Suppose a natural disaster wipes out a significant portion of the economy’s capital stock, reducing the potential level of output. What would you expect to happen to the long-run real interest rate? What impact would this have on the monetary policy reaction curve and the dynamic aggregate demand curve?
Answer to relevant QuestionsExplain how each of the following affects the short-run aggregate supply curve. (LO2)a. Firms and workers reduce their expectations of future inflation.b. There is a rise in current inflation.c. There is a fall in oil prices.You read a story in the newspaper blaming the central bank for pushing the economy into recession. The article goes on to mention that not only has output fallen below its potential level but that inflation had also risen. ...Explain why stabilization policies are usually pursued using monetary rather than fiscal policy. How would a shock that reduces production costs in the economy (a positive supply shock) affect equilibrium output and inflation in the both short run and the long run? Illustrate your answer using the aggregate ...Will changes in technology affect the rate at which the short-run aggregate supply curve shifts in response to an output gap? Why or why not? Provide some specific examples of how technology will change the rate of ...
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