Question

Consider the​ general-equilibrium effects of a temporary adverse supply shock.

For each of the following​ variables, select whether you would expect it to​ increase, decrease, or remain constant in general equilibrium as a result of the temporary supply shock.

Output ______

Answer 1

A temporary adverse supply shock would generally result in decreased output, high unemployment, and concern over rising prices. An increase in supply would lead to higher output at a lower price level. Additionally, understanding the shifts in demand and supply curves is essential to predict changes in equilibrium prices and quantities.

Step-by-step explanation:

In response to a temporary adverse supply shock, we would generally expect output to decrease. This occurs because a supply shock, such as a sudden increase in the price of a key input, would reduce the ability of firms to produce at the same level without increasing prices. Hence, the supply curve shifts to the left. As a result of this, in general equilibrium:

• b. We would expect unemployment to be relatively high. With a decline in output, firms may cut back on production and hence require fewer workers.
• c. We would expect prices to be a relatively large concern for the economy. A reduction in supply typically puts upward pressure on prices, creating concerns of inflation.
• d. If input prices fall, leading to a shift of the Aggregate Supply (AS) curve to the right by 150 units, the new equilibrium will feature higher output at a lower price level than the equilibrium point before the shift if other factors are held constant.

Regarding the product and labor markets, the following happens to equilibrium price and quantity with the respective changes in supply and demand:

• An increase in demand causes both the equilibrium price and quantity to rise.
• A decrease in demand causes both the equilibrium price and quantity to fall.
• An increase in supply causes the equilibrium price to fall and the equilibrium quantity to rise.
• A decrease in supply causes the equilibrium price to rise and the equilibrium quantity to fall.

To analyze the effect of an economic event on equilibrium, one must determine the direction in which the demand or supply curve shifts. Identifying a shift to the right or left is crucial in predicting changes in equilibrium prices and quantities.