PLEASE ANSWER THE E AND F
Suppose that in summer 2021 Consumers decide to spend a lotmore than usual on traveling and summer vacations with the end of the Pandemics.
a. Draw the aggregate demand and the aggregate
supply curves in the short and long run. Assume
that the economy was in equilibrium before this
demand shock. Show the effect of this positive
demand shock, and show the path the economy
will take in the short run. Be sure to show: i. the
direction the curve shifts, i. the short-run
equilibrium values.
b. State in words what happens to prices and
output in the short run.
c. Redraw the diagram from (b) and show the path
the economy will take in the long run. Be sure to
show: i. the long-run equilibrium values. d. State in words what happens to prices and
output in the long run.
e. Suppose that the Fed decides to intervene in the
economy right after this positive shock to keep
prices stable. What policy should the Fed pursue to
accomplish that? Redraw the diagram from (b), but
now showing the path the economy will take under
the Fed intervention. Be sure to show: i. the
direction the curve shifts, i. the new short-run
equilibrium values.
f. What is the impact of the Fed's policy on prices,
income and output in the short run? Would you
recommend this policy? Explain.
