You've considered two different economic shocks resulting from Katrina:
1) An aggregate supply shock: Katrina increased energy prices and temporarily reduced U.S. productive capacity.
2) An aggregate demand shock: Government responded to the hurricane with massive expenditures on aid and rebuilding.
Consider what the aggregate supply and aggregate demand model predicts about the combined economic impact of these two shocks.
What does the aggregate supply and aggregate demand model predict about the combined impact of these shocks on the U.S. economy?
A. Real GDP may rise or fall, but the price level will definitely rise.
B. Real GDP will definitely fall, but the price level will definitely rise.
C. Real GDP may rise or fall, but the price level will definitely fall.
D. Real GDP will definitely rise, but the price level may rise or fall.
Answer Key: A
EXTRA CREDIT
- After Hurricane Katrina hit the Gulf Coast, the federal government devoted a massive amount of spending to aid reconstruction. Some of this aid took the form of direct government purchases of goods and services, like the fees paid to transportation companies and hospitals to take care of victims. Some of the aid, like the $2,000 debit cards given to some displaced families, took the form of direct transfers to citizens. What effect would this governmental aid have on the AS-AD model?
- We can analyze the macroeconomic effects of Hurricane Katrina using the aggregate supply (AS) and aggregate demand (AD) model. The horizontal axis measures real GDP, the vertical axis measures the price level, or the average level of output prices.
- According to the Economic Outlook Group, an economic consultancy in New Jersey, higher energy prices resulting from Katrina may lead the Fed to __________ next time it meets.
- According to Global Insight, a Massachusetts economics consultancy, what will happen if oil prices remain in the range of $65 to $70 per barrel for a couple of more months?