Use the classical (RBC) IS-LM-FE model to show the effects on the economy of a temporary adverse supply shock; for example, an increase in the price of oil. You should show the impact on the real wage, employment, output, the real interest rate, consumption, investment, and the price level.
What will be an ideal response?
The lower TFP reduces the marginal product of labor, thus shifting the labor-demand curve to the left, reducing the real wage and employment. The adverse supply shock thus shifts the FE line to the left because both TFP and employment decline. To restore equilibrium, the price level rises, shifting the LM curve left. The result is lower output and a higher real interest rate. The higher real interest rate reduces investment. The lower income and higher real interest rate reduce consumption.
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Entrepreneurs engage in
A) arbitrage. B) innovation. C) imitation of other successful entrepreneurs. D) all of the above.
In the long run, fixed costs are
A) sunk. B) avoidable. C) larger than in the short run. D) not included in production decisions.
The price of an airline ticket rises as the amount of time between purchase and flight departure gets smaller. The airlines base the policy on the assumption that
a. consumers are not aware of airline prices. b. consumer demand is unrelated to prices. c. consumer demand becomes more elastic as departure time approaches. d. consumer demand becomes less elastic as departure time approaches.
Between the years 2000 and 2010, the price of cars increased substantially as automobile companies added new and improved features and increased the power of car engines. If cars are included in the fixed basket of goods used to calculate the Consumer Price Index, it will fail to reflect true changes in the cost of living of an average consumer because of the: a. new goods bias. b. substitution
bias. c. quantity bias. d. quality bias.