&quiz; action-takeQuiz&quiz; probGuid-ONAPCOA801010000003b87ecf00800008ck-m 1512

Question

&quiz; action-takeQuiz&quiz; probGuid-ONAPCOA801010000003b87ecf00800008ck-m 1512872341468 0AAA062B015E21E9E3 Aa Aa 5. Negative real shock supply (SRAS1) curve, The following graph shows the long-run aggregate supply (LRAS) curve, short-run aggregate and the aggregate demand (ADI) for a hypothetical economy. The economy is current where the inflation rate is 4% and the rate of real growth is 2%. INFLATION RATE (%) LRAS Curves Negat ive Shoc 20 16 12 SRAS2 AD2 SRAS1 2 2610 REAL GDP GROWTH RATE [%) 106 Suppose a negative real shock reduces productivity and shifts the LRAS curve to the left at-296·The short-run aggregate supply curve moves along with the LRAS curve to SRAS2. To combat recession, the government increases spending and shifts the aggregate demand to AD2. Assume no crowding out. Using the graph, fll in the following table. Equilibrium Point Inflation Rate Real Growth Rate Initial After the shock and Before new government spending After new government spending 4% 2% True or False: After a negative shock, if the government increases the aggregate demand

Explanation / Answer

Before the government spending Inflation rate was 8% and real growth rate was -2%.

After new government spending inflation is 12% and real output growth rate is 0%.

After the negative supply shock if the government increases expenditure growth rate rises but inflation rises, even more, is true.

In case of crowding out both the real inflation rate and the real growth rate will be lower. Crowding out will decrease investment and hence demand and output both will be less, keeping inflation and real output down.

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