Consider a baseline long run steady state equilibrium where output is 20 trillion dollars, and the...

 

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Consider a baseline long run steady state equilibrium where output is 20 trillion dollars, and the price level is 100. Note: price expectation is the same as the price level at the long run steady state equilibrium & unemployment is 5% or lower A. In the top panel, draw the baseline long run steady state equilibrium (call it A). Suppose this equilibrium existed in May of 2023. Now draw a bottom panel with Inflation on the vertical and unemployment on the horizontal axis & show a point that represents 2% inflation and 5% unemployment. Call this point E. B. C. Suppose because of a shock, the Aggregate Demand Curve shifts to the right. In the top panel, how will you change your graph in response (you need to show a shift of some curve)? What will happen to the output, employment and price level in the economy? Assume that the economy reaches point B as a result of the shock. How will the market adjustment work in this case? What kind of a shift would it cause in the short run aggregate supply curve and why? Suppose the economy reaches point K after the market adjustment is over. Call this new point to be K. In the bottom panel you need to show a new point called F- you need to determine whether point F will have higher or lower unemployment (or inflation) compared to May of 2023. Consider a baseline long run steady state equilibrium where output is 20 trillion dollars, and the price level is 100. Note: price expectation is the same as the price level at the long run steady state equilibrium & unemployment is 5% or lower A. In the top panel, draw the baseline long run steady state equilibrium (call it A). Suppose this equilibrium existed in May of 2023. Now draw a bottom panel with Inflation on the vertical and unemployment on the horizontal axis & show a point that represents 2% inflation and 5% unemployment. Call this point E. B. C. Suppose because of a shock, the Aggregate Demand Curve shifts to the right. In the top panel, how will you change your graph in response (you need to show a shift of some curve)? What will happen to the output, employment and price level in the economy? Assume that the economy reaches point B as a result of the shock. How will the market adjustment work in this case? What kind of a shift would it cause in the short run aggregate supply curve and why? Suppose the economy reaches point K after the market adjustment is over. Call this new point to be K. In the bottom panel you need to show a new point called F- you need to determine whether point F will have higher or lower unemployment (or inflation) compared to May of 2023.

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SOLUTION A In the top panel the baseline longrun steadystate equilibrium is represented by point A w... View the full answer