Seminar 10: AD shocks, AS shocks
A) Initial State: Natural Level of Output
Problem A1
The economy works at its natural level of output at the price level P1. The aggregate supply is explained by the misperceptions theory. The central bank decides for a massive purchase of government bonds in the open market.
a) What kind of shock does this move of the central bank represent and why?
b) How will this influence the nominal output, the real output, the natural level of output, the employment and the price level in the short run?
c) Explain what will happen in the long run.
d) Graph short-run and long-run processes in an AS-AD diagram.
Problem A2
The economy works at its natural level of output at the price level P1. The aggregate supply is explained by the misperceptions theory. The government decides to increase the taxes.
a) What kind of shock does this move of the government represent?
b) How will this influence the nominal output, the real output, the natural level of output, the employment and the price level in the short run?
c) Explain what will happen in the long run.
d) Graph short-run and long-run processes in an AS-AD diagram.
Problem A3
The economy is working at the natural level of output at the price level P1. The aggregate supply is explained by the sticky-price theory. Then, as a result of positive predictions of economic analysts, the economy is affected by a wave of investment optimism.
a) What kind of shock does this event represent and why?
b) How does this shock influence the real output, the nominal output, the natural level of output, the employment and the price level?
c) Explain the process by means of the sticky-price theory and analyze the processes in the labor market in the short run.
d) Explain what will happen in the long run.
e) Graph short-run and long-run processes in an AS-AD diagram.
Problem A4
The economy is working at the natural level of output at the price level P1. The aggregate supply is explained by the sticky-wage theory. Then, global financial crisis results in a half of domestic commercial banks gone bankrupt which results in a destruction of a half of total deposits in the economy.
a) What kind of shock does this event represent and why?
b) How does this shock influence the real output, the nominal output, the natural level of output, the employment and the price level?
c) Explain the process by means of the sticky-wage theory and analyze the processes in the labor market in the short run.
d) Graph this shock in an AS-AD diagram.
e) What can central bank do about this situation? Graph it in the AS-AD diagram.
f) If the central bank does not do anything, explain what will happen in the long run and graph it in the AS-AD diagram.
Problem A5
The economy is working at the natural level of output at the price level P1. The aggregate supply is explained by the misperceptions theory. Then, the domestic currency appreciat
es substantially with respect to foreign currencies.
a) What kind of shock does this event represent and why?
b) How does this shock influence the real output, the nominal output, the natural level of output, the employment and the price level?
c) Explain the process by means of the misperceptions theory (assume the misperception on the side of employees) and analyze the processes in the labor market in the short run.
d) Graph this shock in an AS-AD diagram.appreciates
e) What can central bank do about this situation? Graph it in the AS-AD diagram.
f) If the central bank does not do anything, explain what will happen in the long run and graph it in the AS-AD diagram.
Problem A6
The economy is working at the natural level of output at the price level P1. (Which theory explains the aggregate supply is unimportant in this case). Then, labor unions step in and enforce an increase in nominal wages.
a) What kind of shock does this event represent?
b) How does this shock influence the real output, the nominal output, the natural level of output, the employment and the price level?
c) Explain the process by means of the Keynes effect in the short run.
d) Analyze the process from a viewpoint of the labor market in the short run.
e) What do we call this situation?
f) Graph this shock in an AS-AD diagram.
Problem A7
The economy is working at the natural level of output at the price level P1. (Which theory explains the aggregate supply is unimportant in this case). Then, bad news make producers and workers expect a substantial increase in the price level.