Throughout much of the 1990s, the United States experienced declining energy prices. Assume that the U.S. economy was in long-run equilibrium before these declines began.
a. Use the aggregate demand-aggregate supply model to illustrate graphically the short-run and long-run impact of this decline on output and prices.
b. If the Federal Reserve attempted to offset this deviation from the natural rate in the short run, should the money supply be increased or decreased?

Question

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The Answer of Throughout much of the 1990s, the United States experienced declining energy prices. Assume that the U.S. economy was in long-run equilibrium before these declines began.
a. Use the aggregate demand-aggregate supply model to illustrate graphically the short-run and long-run impact of this decline on output and prices.
b. If the Federal Reserve attempted to offset this deviation from the natural rate in the short run, should the money supply be increased or decreased?

Throughout Much of the 1990s, the United States Experienced Declining