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Chapter 23: Q.16 (page 618)

Are there any 鈥済ood鈥� supply shocks? Explain.

Short Answer

Expert verified

Yes, increase in oil supply, development of new technology, increase in the supply of raw materials, favorable change in weather, etc. are good supply shocks.

Step by step solution

01

Concept Introduction   

Supply for a product refers to the different volumes of output that a seller is willing and able to sell at different price levels. Supply shocks can be defined as unprecedented changes that cause an increase or decrease in supply and hence in price.

02

Explanation

Some unprecedented events can be favorable to the economy and can contribute to economic growth. Such supply shocks are considered good shocks. For instance, an increase in the supply of oil would contribute to an increase in supply and lower price levels.

Other examples of good supply shocks are favorable changes in weather, development of new technology. increase in the supply of raw materials, etc.

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Most popular questions from this chapter

During 2017 , some Fed officials discussed the possibility of increasing interest rates as a way of fighting potential increases in expected inflation. If the public came to expect higher inflation rates in the future, what would be the effect on the short-run aggregate supply curve? Use an aggregate demand and supply graph to illustrate your answer.

Using an aggregate demand and supply graph, illustrate and describe the following:

a. The short-run effects of an increase in the money supply.

b. The long-run effects of an increase in the money supply.

In its statement dated June 14, 2017, the Federal Open Market Committee indicated that inflation 鈥渋s running somewhat below 2%.鈥� Go to http://research.stlouisfed .org/fred2/, and click on the Series ID link 鈥淐PIAUCSL鈥� (Consumer Price Index for All Urban Consumers: All Items-SA). Then click on the link 鈥淧ercent Change from Year Ago.鈥� What has happened to the inflation rate since the time of the last reported value in Figure 16?

The Problems update with real-time data in My Lab Economics and are available for practice or instructor assignment.

1. Go to the St. Louis Federal Reserve FRED database, and find data on real government spending (GCEC1), real GDP (GDPC1), taxes (WO06RC1 Q 027 SBEA), and the personal consumption expenditure price index (PCECTPI), a measure of the price level. Download all of the data into a spreadsheet, and convert the tax data series into real taxes. To do this, for each quarter, divide taxes by the price index and then multiply by 100 .

a. Calculate the level change in real GDP over the four most recent quarters of data available and the four quarters prior to that.

b. Calculate the level change in real government spending and real taxes over the four most recent quarters of data available and the four quarters prior to that.

c. Are your results consistent with what you would expect? How do your answers to part (b) help explain, if at all, your answer to part (a)? Explain using the IS and A D curves.

Suppose the inflation rate remains relatively constant while output decreases and the unemployment rate increases. Using an aggregate demand and supply graph, show how this scenario is possible.
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