The Economy of Macroland Is Initially in Long-Run Equilibrium

question 21

Essay

The economy of Macroland is initially in long-run equilibrium. A severe drought causes an adverse supply shock.
a. What happens to prices and output in the short run?
b. What would happen to prices and output in the long run if there is no policy accommodation?
c. If the Central Bank of Macroland wants to prevent the short-run changes in price and output, what policy action could it take? How would the results of this policy action differ from the prices and output that would result in the long run with no policy action?

---

Definitions:

Federal Gasoline Tax

A tax imposed by the federal government on the sale of gasoline, primarily used to fund transportation projects.

Taxation Principle

Guidelines and theories in economics that outline how to structure taxes to achieve certain economic objectives, such as fairness, efficiency, and simplicity.

Highway Maintenance

The process of keeping roads in safe, usable condition, including repairs, cleaning, and updating road signs and markings.

Local Finance

Financial activities and policies at a local or municipal level, including budgeting, taxation, and public spending to manage community resources.