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Chapter 11: Q. 7 (page 251)

As in Problem $11 - 6$ , suppose that there is a temporary, but significant, increase in oil prices in an economy with an upward-sloping $S R A S$ curve. In this case, however, suppose that policymakers wish to prevent equilibrium real $G D P$ from changing in response to the oil price increase. Should they increase or decrease the quantity of money in circulation? Why?

Short Answer

Expert verified

The $A D$ demand curve will shift rightward as a result, and optimum nominal $G D P$ will not fall in the short run.

Step by step solution

01

Step: 1 Equilibrium real GDP:

In a market upwards sloping $S R A S$ curve, officials should raise the monetary supply if oil prices rise temporarily but significantly. The $A D$ demand curve will shift rightward as a result, and optimum nominal $G D P$ will not fall in the short run.

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Most popular questions from this chapter

In Figure 11-2, if planned saving was less than planned investment, what would be true of the interest rate in relation to its equilibrium value? How would the interest rate adjust?

Why do you suppose that throughout this decade, the rate of unemployment among male workers has exceeded the unemployment rate among female workers?

Suppose that the Keynesian short-run aggregate supply curve is applicable for a nation's economy. Use appropriate diagrams to assist in answering the following questions:

$(a)$ What are two events that can cause the nation's real $G D P$ to increase in the short run?

$(b)$ What are two events that can cause the nation's real $G D P$ to increase in the long run?

If the credit spread were to widen suddenly and thereby signal weakened credit-market sentiment, would this event foreshadow a future positive or negative aggregate demand shock? Explain.

Consider a country whose economic structure matches the assumptions of the classical model. After reading a recent best-seller documenting a growing population of low-income elderly people who were ill prepared for retirement, most residents of this country decide to increase their saving at any given interest rate. Explain whether or how this could affect the following:

$(a)$ The current equilibrium interest rate

$(b)$ Current equilibrium real $G D P$

$(c)$ Current equilibrium employment

$(d)$ Current equilibrium investment

$(e)$ Future equilibrium real $G D P$

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