The 1974-1975 period experienced a recession caused by a supply shock. In particular following the Arab-Israeli...

 

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The 1974-1975 period experienced a recession caused by a supply shock. In particular following the Arab-Israeli War of 1973, the Organization of the Petroleum Exporting Countries (OPEC) took actions that increased the price of a barrel of oil from less than $3 to more than $10 (Hubbard and O'Brien, 2015). This is illustrated in the aggregate supply-aggregate demand figure below. Assume that the aggregate demand curve did not shift between 1974 and 1975. Price level (GDP deflator, 2009 = 100) 31.4 28.7 1975 LRAS 1974 SRAC1975 1974 SRAS1974 LRAS1975 5.38 5.39 5.42 Real GDP (trillions of 2009 dollars) a) What is the growth rate in potential GDP from 1974 to 1975? b) In which year (1974 or 1975) is the unemployment rate higher? c) What is the inflation rate in 1975 (or from 1974 to 1975)? AD 1974, 1975 5.61 d) What is the growth rate of real GDP in 1974 (or from 1974 to 1975)? The 1974-1975 period experienced a recession caused by a supply shock. In particular following the Arab-Israeli War of 1973, the Organization of the Petroleum Exporting Countries (OPEC) took actions that increased the price of a barrel of oil from less than $3 to more than $10 (Hubbard and O'Brien, 2015). This is illustrated in the aggregate supply-aggregate demand figure below. Assume that the aggregate demand curve did not shift between 1974 and 1975. Price level (GDP deflator, 2009 = 100) 31.4 28.7 1975 LRAS 1974 SRAC1975 1974 SRAS1974 LRAS1975 5.38 5.39 5.42 Real GDP (trillions of 2009 dollars) a) What is the growth rate in potential GDP from 1974 to 1975? b) In which year (1974 or 1975) is the unemployment rate higher? c) What is the inflation rate in 1975 (or from 1974 to 1975)? AD 1974, 1975 5.61 d) What is the growth rate of real GDP in 1974 (or from 1974 to 1975)?

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Growth Rate in Potential GDP 19741975 as LRAS is always Verti... View the full answer