Macroeconomics

‭Efects of Supply Shocks on Short-Run Equilibrium‬ ‭Recall‬‭that‬ ‭supply‬‭shocks‬‭are‬‭sudden,‬‭unexpected‬‭events‬‭that‬‭disrupt‬‭the‬‭supply‬‭of‬‭key‬‭resources‬‭or‬ ‭inputs‬ ‭.‬ ‭A‬ ‭positive‬ ‭supply‬‭shock‬ ‭occurs‬ ‭when‬‭SRAS‬‭increases‬ ‭(shifts‬‭to‬‭the‬‭right),‬‭whereas‬‭a‬ ‭negative‬ ‭supply shock‬ ‭occurs‬ ‭when SRAS decreases‬ ‭(shifts to‬‭the left).‬ ‭In‬ ‭the‬ ‭short‬ ‭run,‬ ‭a‬ ‭positive‬ ‭supply‬ ‭shock‬ ‭(e.g.,‬ ‭a‬ ‭drop‬ ‭in‬ ‭oil‬ ‭prices)‬ ‭reduces‬ ‭the‬ ‭price‬ ‭level‬ ‭and‬ ‭increases‬ ‭real‬ ‭GDP‬ ‭.‬ ‭Alternatively,‬ ‭a‬ ‭negative‬ ‭supply‬ ‭shock‬ ‭(e.g.,‬ ‭a‬ ‭hurricane‬ ‭that‬ ‭damages‬ ‭crops)‬ ‭raises the price level and reduces real GDP‬ ‭as illustrated in the diagrams below.‬

‭Supply shocks affect real GDP, unemployment, and the price level as follows:‬

‭Table 3: Impact of Supply Shocks on Macroeconomic Aggregates‬ ‭Supply Shock‬ ‭Impact on Real GDP‬ ‭Impact on‬ ‭Unemployment Rate‬

‭Impact on Price Level‬

‭Positive: ↑SRAS‬

‭↑RGDP‬

‭↓UR‬

‭↓PL‬

‭Negative: ↓SRAS‬

‭↓RGDP‬

‭↑UR‬

‭↑PL‬

‭This‬ ‭allows‬ ‭us‬ ‭to‬ ‭conclude‬ ‭that‬ ‭inflation‬ ‭can‬ ‭also‬ ‭be‬ ‭caused‬ ‭by‬ ‭changes‬ ‭in‬ ‭aggregate‬ ‭supply‬ ‭(cost-push inflation whereby a decrease in SRAS raises the price level).‬ ‭F. Self-Correction of Output Gaps‬ ‭In‬ ‭macroeconomics,‬ ‭short-run‬ ‭equilibrium‬ ‭is‬ ‭characterized‬ ‭by‬ ‭rigid‬ ‭and‬ ‭sticky‬ ‭prices‬ ‭,‬ ‭including‬ ‭wages.‬ ‭This‬ ‭results‬ ‭in‬ ‭temporary‬ ‭imbalances‬ ‭in‬ ‭resource‬ ‭markets‬ ‭,‬ ‭mainly‬ ‭the‬ ‭underemployment‬ ‭or‬ ‭overemployment‬ ‭of‬ ‭labor‬ ‭that‬ ‭we‬ ‭previously‬ ‭defned‬ ‭as‬ ‭output‬ ‭gaps‬ ‭.‬ ‭Self-correction‬ ‭is‬ ‭the‬ ‭process‬

‭102‬

‭© 2024 ACHIEVE ULTIMATE CREDIT-BY-EXAM GUIDE‬‭|‬‭MACROECONOMICS‬