Trace an adverse supply shock through AD–AS
Three steps, the way the exam actually works: work through the lab, write down your own measurements, then answer a 6-point free response. What you recorded goes to the grader with your writing, so a conclusion that does not follow from your own numbers will cost you the point — exactly as it would with a real reader.
Run the investigation
- 1Reset the model, then record real GDP, the price level, and unemployment at the starting equilibrium.
- 2Apply an adverse supply shock.
- 3Record real GDP, the price level, and unemployment again.
- 4Note whether the lab now describes the economy as being in an inflationary gap, a recessionary gap, or at full employment.
Booting the lab…
Record what you measured
These are your numbers, not ours. The grader sees them, so your conclusions have to follow from what you actually recorded.
| Real GDP (Y*) before the shock | |
|---|---|
| Price level (P*) before the shock | |
| Unemployment before the shock | % |
| Real GDP (Y*) after the shock | |
| Price level (P*) after the shock | |
| Unemployment after the shock | % |
Answer the free response
An economy starting at full employment is hit by an adverse supply shock. (a) Describe what happened to real output and to the price level, citing your before-and-after values, and name the macroeconomic condition that those two movements together define. (b) Explain why an adverse supply shock moves output and the price level in OPPOSITE directions, and contrast that with what a decrease in aggregate demand would do. (c) Your unemployment reading changed. Explain the relationship between the output gap and cyclical unemployment that produces that change. (d) A policymaker proposes expansionary monetary policy in response. Explain the trade-off involved and state what would happen to the price level.
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