Question

Based on the News Wire, illustrate the shift in aggregate supply that occurs and then answer two questions about the macro outcomes. NEWS WIRE: SHIFTING AGGREGATE SUPPLY Harvey Slams Into Houston Area Hurricane Harvey is turning into one of the costliest natural disasters in U.S. history. The Houston area was the hardest hit. Winds of up to 132 miles per hour and unrelenting rainfall have inflicted $125 billion of damage. Over 300,000 structures and 500,000 vehicles were damaged, displacing 32,000 people. Houston's two airports were shut down, and flooding closed most roadways. Houston-area oil refineries were also shut down, eliminating about 20 percent of the state's gasoline supply. Source: News accounts of August–September 2017. Illustrate the AS shift that occurs based on the events described in the News Wire. Instructions: Grab the AS curve and drag and drop it to a new position to represent the resulting shift in AS. What are the macro results? Output . The price level . How can the economy stay healthy in this case? Government could enact policy to cause aggregate demand to . Government could enact policy to cause aggregate supply to .

Answer 1

By implementing a combination of these policy options, the government can help the economy recover from the negative effects of Hurricane Harvey and promote sustainable growth. The aim is to support both aggregate demand and aggregate supply to stabilize output and keep inflation under control.

Aggregate Supply Shift Due to Hurricane Harvey

Shift:

Hurricane Harvey caused a leftward shift in the aggregate supply (AS) curve. This means that at any given price level, the economy produces less output.

Macro Outcomes:

1. Output: As a result of the AS shift, the output (real GDP) will decrease significantly. The hurricane caused widespread damage and disruptions to production, leading to reduced output across various industries, including oil refining, transportation, and construction.

2. Price level: Due to the decrease in output and limited supply, the price level (inflation) will likely rise. This can be attributed to the basic economic principle of supply and demand. When the supply of goods and services decreases while demand remains constant or increases, prices tend to rise.

Policy Options:

1. Increase aggregate demand (AD):

Fiscal policy: The government can increase government spending or decrease taxes to inject more money into the economy and boost demand. This could help stimulate production and offset the negative effects of the hurricane.

Monetary policy: The central bank can lower interest rates to make borrowing cheaper and encourage investment and spending.

2. Increase aggregate supply (AS):

Disaster relief: The government can provide financial aid and resources to rebuild affected areas, repair infrastructure, and support businesses and individuals impacted by the hurricane. This can help restore production capacity and bring the AS curve back to its original position.

Investment in infrastructure: The government can invest in infrastructure projects like roads, bridges, and ports to improve transportation and logistics, making it easier for businesses to operate and deliver goods and services.

Relaxing regulations: The government could temporarily relax certain regulations to allow businesses to operate more efficiently and quickly recover from the disaster. This could include easing zoning laws or environmental regulations to expedite reconstruction efforts.

Staying Healthy:

By implementing a combination of these policy options, the government can help the economy recover from the negative effects of Hurricane Harvey and promote sustainable growth. The aim is to support both aggregate demand and aggregate supply to stabilize output and keep inflation under control. This will require careful consideration of the specific economic conditions and potential long-term impacts of different policy interventions.