Consider an economy that begins with real GDP equal to potential GDP. There is then a sudden

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Consider an economy that begins with real GDP equal to potential GDP. There is then a sudden increase in the prices of raw materials, which shifts the aggregate supply (AS)curve upward.

a. Draw the initial long run equilibrium in an AD/AS diagram.

b. Now show the immediate effect of the supply shock in your diagram.

c. Suppose wages and prices in this economy adjust instantly to shocks. Explain what happens to unemployment in this economy.

d. If wages and prices adjust only slowly to shocks what happens to unemployment? Explain.

e. Based on the evidence in the Canadian economy, which is the more realistic adjustment to the AS shock?

Related Book For answer-question

Economics Today

ISBN: 978-0132554619

16th edition

Authors: Roger LeRoy Miller

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Posted Date: Feb 23, 2024 05:06 AM

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Consider an economy that begins with real GDP equal to potential GDP. There is then a sudden

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Expert Answer:

a In the initial longrun equilibrium potential GDP equals real GDP and the economy operates at the natural level of output This equilibrium is represe... View the full answer

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