Week 11

Question 0

What is an example of a supply shock?

Answer 0

Natural disasters, technical change, oil shock

Question 1

What are demand shocks usually the result of?

Answer 1

Macroeconomic policies

Question 2

What could explain the dramatic increase in inflation in the 1970s?

Answer 2

The oil shocks in 1973 and 1979 created a supply shock. So AS was shifted leftward - reduced output and increased inflation

Instead of leaving the economy, policy makers did expansionary fiscal policy and loose monetary so AD shifted right

Inflation got even higher until output went back to equilibrium

Question 3

There is a trade off between unemployment and….

Answer 3

Inflation

Question 4

What does Philips curve show?

Answer 4

There is a negative trade off between inflation and unemployment

Question 5

What shifts the Phillips curve?

Answer 5

A change in underlying inflation, equilibrium unemployment and supply shocks

Question 6

In the 70s what caused a shift in the laffers curve and consequently an increase in inflation?

Answer 6

Supply shocks - oil shock when oped counties increased price
Underlying inflation- increased from expansionary fiscal policy
Equilibrium unemployment - loss of 23% of jobs

Question 7

What does Okuns Law show?

Answer 7

There is a link between the unemployment gap and output gap

Question 8

Why does unemployment have a multiplier effect?

Answer 8

Because if you’re out of work you stop producing and buying

Also risk of unemployment may reduce consumption by workers

Question 9

A rise in oil prices would cause a demand shock or supply shock?

Answer 9

Supply, like in the 70s

Question 10

Low house prices would cause a ….. Shock?

Answer 10

Demand shock like in the 80s