Evaluate the Following Situations, Given a Lucas Supply Function Where

question 12

Essay

Evaluate the following situations, given a Lucas supply function where Y = 200 + 75(P - Pe), the current price level is 2, and the expected price level is 2.
(a) What happens to output when sudden oil shortages cause the price to increase from 2 to 2.5?
(b) The Federal Reserve was expected to enact a new policy that would have increased the price level from 2 to 2.4, but due to unexpected shocks the price level increased to 2.8. With these changes, what is the effect on output?
(c) The news media found unreported information that inflation would increase considerably under a recent fiscal policy package. What is the effect on output if the media reports to the public that, with this fiscal policy approach, inflation is expected to increase to a level of 3?

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Definitions:

Pleasure

A feeling of happiness, enjoyment, or satisfaction derived from an experience that is pleasing to the senses or mind.

Hippocampus

A region of the brain involved in the formation of new memories and is also associated with learning and emotions.

Conscious Memories

Memories that can be intentionally recalled, reflecting experiences we are aware of.

Limbic System

A complex system of nerves and networks in the brain, involving several areas near the edge of the cortex concerned with instinct and mood. It controls the basic emotions (fear, pleasure, anger) and drives (hunger, sex, dominance, care of offspring).