Hurricane Katrina resulted in a decline in oil production infrastructure along the gulf coast. As a result there was an unexpected decline in oil and natural gas supplies in 2005. Suppose that this caused an increase in the price level and a decline in
real GDP in 2006. Also assume that potential real GDP continued to grow due to other factors. You can assume the aggregate demand curve did not change. Show the macroeconomic equilibrium for 2005 and 2006 using the dynamic aggregate supply and aggregate demand model.
What will be an ideal response?
The economy began at the point (Y1, P1 ) on the aggregate demand curve in 2005. The loss in supply of oil and natural gas were supply shocks which shifted the SRAS curve to the left. The economy ended up at the short-run equilibrium in 2006 with the price level rising from P1 to P2 and real GDP falling from Y1 to Y2. The economy ended up at a real GDP level Y2 which was below the potential level of GDP for 2006 which was at Y3. Unemployment rose in the economy as a result.
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Balanced budget multiplier (= +5 - 4 = 1. Thus the impact on economic equilibrium is exactly equal to the original change in government spending (and taxes). So we can say that ?Y = ?G.**)
What will be an ideal response?
The figure above shows a nation's production possibilities frontier for apples and oranges
a) What combination of goods is represented by point A? b) What combination of goods is represented by point B? c) Which point represents an unattainable combination of goods?