The Economy of Macroland Is Initially in Long-Run Equilibrium

question 65

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 Macrol and 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?

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Definitions:

Pupil Dilation

The process by which the pupil, the black circular opening in the center of the iris, enlarges or widens to allow more light to enter the eye, often in response to low light conditions, emotional state, or other factors.

Physiological Responses

Automatic reactions of the body to a stimulus, including changes in heart rate, respiration, and secretion of hormones.

Fear

A negative feeling resulting from the assumption that a person or object poses a risk, potential harm, or is menacing.

Joy

A feeling of great pleasure and happiness.