Answer to Question #96877 in Macroeconomics for Tiffany

Question

2. Apply your knowledge of the AD/AS model to predict the effect on economic variables (i.e., P, RGDP, interest rates, wages, savings and spending) of some events on the U.S. economy. Diagram the effect of the following events. Be sure to explain the effects in the short run and effects in the long run for each question, in words. To keep things clear, assume that in each case the economy starts out at long-run equilibrium.

b. Tensions in South America dramatically increase the price of coffee. For the sake of argument, suppose coffee is an important input in many industries, including computer programming, transportation, and financial services.

Answer 1

2. For example, the trade war with China will affect aggregate supply, which will decrease. As a result the price level will increase, and the output level will decrease. Wages will decrease too, and the interest rates will increase.

b. As a result of coffee price increase the aggregate supply will decrease. The price level will increase, and the output level will decrease.