The economy of Macroland is initially in long-run equilibrium. A severe drought causes an adverse supply shock.

a. What happens to prices and output in the short run?
b. What would happen to prices and output in the long run if there is no policy accommodation?
c. If the Central Bank of Macrol and wants to prevent the short-run changes in price and output, what policy action could it take? How would the results of this policy action differ from the prices and output that would result in the long run with no policy action?

Question

The economy of Macroland is initially in long-run equilibrium. A severe drought causes an adverse supply shock.

a. What happens to prices and output in the short run?
b. What would happen to prices and output in the long run if there is no policy accommodation?
c. If the Central Bank of Macrol and wants to prevent the short-run changes in price and output, what policy action could it take? How would the results of this policy action differ from the prices and output that would result in the long run with no policy action?

Quizplus · Accepted Answer

The Answer of The economy of Macroland is initially in long-run equilibrium. A severe drought causes an adverse supply shock.

a. What happens to prices and output in the short run?
b. What would happen to prices and output in the long run if there is no policy accommodation?
c. If the Central Bank of Macrol and wants to prevent the short-run changes in price and output, what policy action could it take? How would the results of this policy action differ from the prices and output that would result in the long run with no policy action?

The Economy of Macroland Is Initially in Long-Run Equilibrium