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.

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

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?

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?

A. The AD curve would shift to the left.


B. The AD curve would shift to the right.

C. Both the AD curve and the SRAS curve would shift to the right.

D. Both the AD curve and the SRAS curve would shift to the left.

E. The SRAS curve would shift to the left.

F. Neither the AD curve nor the SRAS curve would shift.

G. The SRAS curve would shift to the right.


Answer Key: B

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.

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. 

Suppose Hurricane Katrina unexpectedly disrupted oil, natural gas, and refined gasoline supplies from the Gulf region, placing upward pressure on energy costs. The hurricane also shut down factories and businesses, reducing the nation's productive capacity. What effect would higher energy prices and reduced productive capacity have on the AS-AD model?

A. The AD curve would shift to the left.

B. The AD curve would shift to the right.

C. Neither the AD curve nor the SRAS curve will shift.

D. Both the AD curve and the SRAS curve will shift to the right.


E. The SRAS curve would shift to the left.

F. The SRAS curve would shift to the right.

G. Both the AD curve and the SRAS curve will shift to the left.


Answer Key: E

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 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.

A. raise interest rates

B. skip an expected rate cut


C. skip an expected rate hike

D. lower interest rates


Answer Key: C

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?

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?

A. Gasoline prices could reach $4.75 per gallon.

B. The Fed will almost certainly cut interest rates the next time it meets.


C. U.S. GDP growth will drop 0.3% to 0.5% in the fourth quarter of 2005.

D. U.S. GDP growth will drop by 7% in the fourth quarter of 2005.


Answer Key: C