Answer to Question #157840 in Macroeconomics for Asif khan

Question

Identify whether the following cases mention in part 1 to 5 .represent an aggregate demand shock or aggregate supply shock graphically sketch the impact of each shock AD-AS frame work. And discuss the role of stabilization policy can play in each case to counter the shock.

1)people leaving the economy have become inclined to hold the money due to lack of trust on financial market which provide alternative mean of keeping their money

2)drought has struck the economy badly and have major distruction to the yield of many crops.

3)central bank decide to increase money supply

4)firm decide to provide capital units to the labour they employed.

5)if the specific economy is subject to energy crises.

Answer 1

(1) aggregate demand shock.

The role of stabilization policy here will be to provide national defense to it's citizens.

(2) aggregate supply shock.

The role of stabilization policy here will be to reduce the discount rate.

(3) aggregate demand shock.

The role of stabilization policy here will be to increase tax.

(4) aggregate supply shock.

The role of stabilization policy here will be to ensure there is cash reserves in the banks.

(5) aggregate supply shock.

The role of stabilization policy here will be to reduce the interest rates on energy.