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Chapter 12: Q9. (page 259)

True or False. If the price of oil suddenly increases by a large amount, AS will shift left, but the price level will not rise thanks to price inflexibility.

Short Answer

Expert verified

The statement is false.

Step by step solution

01

Meaning and shifts in the aggregate supply

Aggregate supply is the price level for the output at a given output level, which the suppliers receive.In different words, it is the total output supplied in the economy worth the price level.

A change in productivity or production costs (input prices) shifts the aggregate supply curve. A decrease in aggregate supply will create cost-push inflation in the economy. On the contrary, an increase in aggregate supply will pull the economy towards full employment and price stability.

02

Reason for the false statement.

An increase in oil prices by a significant amount will shift the AS curve to the left because of the increased input costs for the U.S. economy. Due to the leftward shift of the AS curve, the price level will rise.

The prices are flexible upward, so the price level will not be stuck at the initial level by the leftward shift in the AS curve. That鈥檚 why the oil prices increased in 1973, causing the infamous oil-price shocks of the 1970s.

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Most popular questions from this chapter

Suppose that the aggregate demand and aggregate supply schedules for a hypothetical economy are as shown in the following table.

Amount of Real GDP Demanded, BillionsPrice Level (Price Index)Amount of Real GDP Supplied, Billions
\(100300450
200250400
300200300
400150200
500100100

a. Use the data above to graph the aggregate demand and aggregate supply curves. What are the equilibrium price level and the equilibrium level of real output in this hypothetical economy? Is the equilibrium real output also necessarily the full-employment real output?

b. If the price level in this economy is 150, will quantity demanded equal, exceed, or fall short of the quantity supplied? By what amount? If the price level is 250, will the quantity demanded equal, exceed, or fall short of the quantity supplied? By what amount?

c. Suppose that buyers desire to purchase \)200 billion of extra real output at each price level. Sketch in the new aggregate demand curve as AD1. What are the new equilibrium price level and level of real output?

What is the wealth effect?

Use shifts of the AD and AS curves to explain (a) the U.S. experience of strong economic growth, full employment, and price stability in the late 1990s and early 2000s and (b) how a strong negative wealth effect from, say, a precipitous drop in house prices could cause a recession even though productivity is surging.

In early 2001 investment spending sharply declined in the United States. In the 2 months following the September 11, 2001 attacks on the United States, consumption also declined. Use AD-AS analysis to show the two impacts on real GDP.

Explain: 鈥淯nemployment can be caused by a decrease of aggregate demand or a decrease of aggregate supply.鈥� In each case, specify the price-level outcomes.
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