Shocks to the economy occur: whenever the price level changes. whenever government implements fiscal or monetary policy. when expectations are unmet. because most economic behavior is unpredictable.
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- Milton Friedman argued nearly all economic fluctuations were caused by Multiple Choice sticky wages. changes in the money supply. unexpected demand shocks. changes in government spending.Consumers expect an increase in the future price of a good, then neither demand nor supply will shift. current demand will increase (shift rightward). current demand will decrease (shift leftward). current supply will increase (shift rightward).The internet and jet engine are examples of technology that caused Beneficial demand shocks Harmful demand shocks Beneficial supply shocks Harmful supply shocks
- Which of the following would properly be classified as a favorable supply shock? a)A hurricane hits a major city, destroying factories, roads, airports, and homes. Because the city was a major port and transportation hub, goods and services need to be rerouted, increasing transportation costs for firms nationwide. b)The interest rate decreases, spurring investment spending. c)There is a technological improvement that allows firms to reduce their costs of production permanently. d)There is an increase in government spending. e)The world price of oil increases rapidly without warning and is expected to remain at the new high level for many years, making it more expensive for all firms to produce goods and services.The government decides that it will cut taxes in an attempt to move the economy out of a severe recessionThe consequences of climate change on the economy is a popular topic in the media. Suppose that a series of wildfires destroys crops in the western states at the same time a hurricane destroys refineries on the Gulf Coast. a) Using aggregate demand and supply analysis, explain how output and the inflation rate would be affected in the short and long runs. b) Show your answer graphically.
- What happened first was a major policy-induced supply shock. The lockdown forced firms in several directly affected sectors, from restaurants to hotels to airlines, to halt (or at least to drastically decrease) supply. In contrast to other supply shocks analyzed earlier in the book, many firms had no choice other than to stop or decrease production. As a result of sharply lower output, and thus lower income, and of increased uncertainty, this shock had a major effect on demand, not just in the sectors directly affected by the lockdown, but also in the non-affected sectors. Thus, the outcome was a combination of a supply shock and a sharp demand response. In that context, the role of macroeconomic policy was twofold. First: While it could not do much to increase output in the affected sectors, it needed to protect the firms in those sectors from going bankrupt and the workers who lost work from going hungry. Second: It needed to limit the effect of lower demand in the non-affected…Governments closely monitor the growth and contraction of their economies in order to manage the well-being of their citizens. When economies grow, well-being generally increases. When economies contract, the resulting reduced consumption usually causes hardship. To avoid contraction (also called recession), governments use fiscal and monetary policies to stimulate the economy. Fiscal policy operates based on government budgets, spending, and tax rates. Monetary policy is a tool of central banks and consists of changes to monetary supply and interbank lending rates. For this activity, What is today’s U.S. Federal Reserve Bank’s discount rate? When did the discount rate last change and why? Look for trends and predictions. What is the consensus? What about this consensus should make people feel secure or anxious?Keynes and his followers believed that capitalism was one economic system that guaranteed full employment. wages and prices in the short run were flexible. the economy could not operate at any level of real Gross Domestic Product (GDP) less than full capacity. there was no guarantee that a capitalist economy would reach a full employment equilibrium.
- You are the chair of the president’s Council of Economic Advisers. There has been an extremely hot and dry summer due to climate change. As a result, crop production has fallen drastically. The president calls you to the White House to discuss the impact on the economy. Would you explain to the president that a sharp drop in U.S. crop production would cause inflation, unemployment, or both?a) Consider the Keynesian models of Business Cycles. Suppose you see a recession (drop in output) that is accompanied by a decline in inflation. What types of shocks could have possibly triggered such a recession? b) Consider the Keynesian models of Business Cycles. Suppose you see a recession (drop in output) that is accompanied by an increase in inflation. What types of shocks could have possibly triggered such a recession?The Employment Act of 1946 states that the Fed should use monetary policy only to control the rate of inflation. the government should periodically increase the minimum wage and unemployment insurance benefits. the government should promote full employment and production. the government should aim for a 0% unemployment rate.