Answer to Question #159711 in Macroeconomics for umer

Question

Due to COVID-19 situations the oil prices fall in international market. Let’s assume that output starts at its natural level.

a.    What happens to the Pakistan’s economy (output and price) in the short run? Explain your answer using AS-AD graphs. (2.5 Marks, Maximum 150 words)

 

What happens to Pakistan’s economy (output and price) in the long run? Explain your     answers using graphs.

Answer 1

a. As a result, Pakistan’s AD and AS will increase. Hence, the output will increase and price may increase in the short run.

b. Pakistan’s economy will stop rising and pull back. Hence, the output will decrease, and price may either increase or decrease in the long run.

In the AD/AS diagram, long-run economic growth due to productivity increases over time will be embodied by a gradual shift to the right of collective supply.

In the short run, GDP falls and rises in every economy, as the economy dips into collapse or enlarges out of a slump.