Describe the effects of an oil price shock in a Keynesian model; why are such supply shocks difficult to handle using macroeconomic stabilization policies?
What will be an ideal response?
The FE line shifts left, the LM curve even more so, so the economy enters a recession. The price level rises immediately, the real interest rate rises, and output declines. Macroeconomic stabilization policy can't restore output to its previous level, for the attempt to do so will cause inflation. Even restoring the economy to its (lower) full-employment level of output is difficult without risking even higher inflation.
You might also like to view...
Which of the following is necessary for allocative efficiency to be achieved?
A) Marginal benefit must be maximized. B) Marginal cost must be minimized. C) Marginal benefit must equal marginal cost. D) The difference between marginal benefit and marginal cost must be maximized. E) Production must be at a point inside the production possibilities frontier.
Lower marginal tax rates facilitate a higher return to innovative and risk-taking behavior
a. True b. False
Those who advocate a role for the World Bank in establishing systems of well-defined property and contract rights in developing nations would argue that
A) such changes would eliminate the need for short-term loans. B) such changes would make these economies more productive. C) such changes would eliminate the need for long-term capital funding. D) asymmetric information is currently not a problem in these countries.
Suppose the court system begins to make it easier for plaintiffs to win large payments from doctors and other medical professionals who are accused of malpractice. What result would you expect?
A. Doctors would order more diagnostic tests and treatment procedures even when the costs of those procedures exceed the benefits to the patient. B. Claims on medical insurance plans would probably fall. C. The cost of medical care would fall because doctors would avoid expensive tests and treatments. D. More people would seek training to become medical professionals because they would be able to make more money ordering tests and treatment procedures.