SOLVED

12.5Â Â AD/AS Analysis of Foreign Business Cycle Episodes 1) The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is an appropriate description of the mechanism that would have ensued? A) The increase in the price of oil would have immediately shifted the AS curve to the right B) The financial crisis would have led to a sharp contraction in spending shifting the AD curve to the right C) Shifts in both the AD and the AS curve would have ensued in the short-run but as long as neither shock had an impact on potential output, ultimately unemployment will have been unaffected in the long run D) all of the above E) none of the above 2) The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is true of the United Kingdom’s experience? A) The increase in the price of oil immediately shifted the AS curve to the left B) The financial crisis did not take hold right away so the AD curve did not immediately shift C) Eventually, the Lehman Brothers bankruptcy caused a negative demand shock leading to a further fall in output and an increase in the unemployment rate D) all of the above E) none of the above 3) The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is true of the Chinese experience? A) The worldwide decline in demand led to a collapse of Chinese exports B) Instead of relying solely on the economy’s self-correcting mechanism, much more aggressive fiscal expansions than those of the U.S. (in addition to a substantial monetary easing) served to shift the AD curve back to general equilibrium relatively quickly C) The Chinese economy was better able than the U.S. economy to weather the financial crisis with output growth starting to grow earlier and more quickly than that of the U.S. D) all of the above E) none of the above 4) On the graph above (and considering the short run only), a combination of a negative demand shock and a negative supply shock may be represented by the movement from point ________ to point ________. A) G; I B) H; F C) H; I D) G; F E) G; H 5) In the long run, following a combination of a negative demand shock and a temporary negative supply shock, ________. A) both inflation and output return to the original long-run equilibrium values B) inflation is permanently increased, while output returns to potential output C) output returns to potential output, while inflation may be higher or lower than its initial value D) inflation is permanently reduced, while output returns to potential output E) none of the above 6) As of 2009, China’s economy had recovered from the global recession that began in 2008. Use aggregate demand and aggregate supply analysis to explain why, and to explain the likely consequences for China of an increase in the growth rate of the global economy.