Monetary Macroeconomics and Policy assignment Essay

Monetary Macroeconomics and Policy assignment - Essay Example (b) A scenario where the households become more optimistic can be classified under the demand shock. As households become optimistic in the future, they will tend to consume less (reduced demand), with the hope that maybe they are going to consume more in the future at relatively lower costs. As a result, producers will lower their level of production a little bit and also lower their prices as well. The effect of reduced prices of commodities is reduced level of inflation in the long run, in the economy. (C) The case of favorable weather would be classified under the supply shock. Favorable weather may mean vast surplus of wheat and corn than the normal expected supply. A favorable weather may imply increases level of supply (output) and hence reduced prices of commodities. Continued reduction on the prices of commodities will lower the level of inflation in the long run (d) The situation under which the steel workers go on strike for four weeks may be classified under the demand shock. The fact that the steel workers goes on strike means that they are no longer producing steel and the supply (output) of steel goes down immediately (short-run). Due to scarcity of steel, the price of steel goes high and if the prices remain high, there will be inflation in the long-run. This is shown in the graph below. If we examine the case of the aggregate supply curve, we realize that it examines how different quantities of goods and services relate with the price level in the economy. The aggregate supply curve is upward sloping. However, the curve will tend to be vertical, or will become vertical in the long run. The supply will be affected by factors such as technology and overall improvements that affects productivity in the short-run and in the long-run. Factors such as increased efficiency and offering of public goods at relatively lower prices will shift the AS curve to the right. In the case where the public expects the level of interest