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Chapter 18: Q8. (page 389)

Aggregate supply shocks can cause _______ inflation rates that are accompanied by _______ unemployment rates.

a. higher; higher

b. higher; lower

c. lower; higher

d. lower; lower

Short Answer

Expert verified

The correct option is (a).

Step by step solution

01

The explanation for correct option (a)

The adverse supply shock leads to a leftward shift in the short-run aggregate supply curve. As a result, the output level and the price level increase. If the output level falls below the full-employment level, the current unemployment rate rises above its natural rate.Thus, negative supply shock causes an increase in both the inflation rate and unemployment rate.

So, option (a) is correct.

02

The explanation for incorrect options (b), (c), and (d). 

Option b) is incorrect because if the aggregate supply curve shifts leftward, then the price level would be higher, the output level would be lower, and the unemployment rate would be higher and not lower.

The price level rises and the unemployment rate falls due to the rightward shift of the aggregate demand curve.

Option c) is incorrect because if the aggregate supply curve shifts leftward, the price level would be higher and not lower, the output level would be lower, and the unemployment rate would be higher.

The price level falls, and the unemployment rate rises due to the leftward shift of the aggregate demand curve.

Option d) is incorrect because if the aggregate supply curve shifts leftward, then the price level would be higher and not lower, the output level would be lower, and the unemployment rate would be higher and not lower. Both price level and the unemployment rate fall due to the rightward shift of the aggregate demand curve.

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Most popular questions from this chapter

Suppose that the equation for a particular short-run AS curve is P = 20 + 0.5Q, where P is the price level and Q is real output in dollar terms. What is Q if the price level is 120? Suppose that the Q in your answer is the full-employment level of output. By how much will Q increase in the short run if the price level unexpectedly rises from 120 to 132? By how much will Q increase in the long run due to the price level increase?

Suppose that AD and AS intersect at an output level that is higher than the full-employment output level. After the economy adjusts back to equilibrium in the long run, the price level will be _______.

a. higher than it is now

b. lower than it is now

c. the same as it is now

Suppose the full-employment level of real output (Q) for a hypothetical economy is $250 and the price level (P) initially is 100. Use the short-run aggregate supply schedules below to answer the questions that follow:

AS(P100)
AS(P125)
AS(P75)
PQPQPQ
125280125250125310
100250100220100280
752207519075250

What is the level of real output in the short run if the price level unexpectedly rises from 100 to 125 because of an increase in aggregate demand? What happens if the price level unexpectedly falls from 100 to 75 because of a decrease in aggregate demand? Explain each situation, using numbers from the table.

b. What is the level of real output in the long run when the price level rises from 100 to 125? When it falls from 100 to 75? Explain each situation.

c. Illustrate the circumstances described in parts a and b on graph paper, and derive the long-run aggregate supply curve.

Between 1990 and 2009, the U.S. price level rose by about 64 percent while real output increased by about 62 percent. Use the aggregate demand鈥揳ggregate supply model to illustrate these outcomes graphically.

Identify the two descriptions below as being the result of either cost-push inflation or demand-pull inflation.

a. Real GDP is below the full-employment level and prices have risen recently.

b. Real GDP is above the full-employment level and prices have risen recently.
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