It is often the case that the economy is hit by both an AD and a
real shock at the same time. This can make it difficult to
interpret what is causing changes in inflation and real growth, and
therefore, what should be done about the shocks (if anything).
For each of the following cases, what will these shocks do to
inflation and real growth? Will inflation/real growth rise, fall,
or is the change ambiguous (maybe the two shocks push inflation or
real growth in opposite directions)?
A- The nice weather improves this year's crop output (positive
real shock), and investors gain confidence because of it (positive
AD shock)
B- There is a financial crisis that makes the banking system
inefficient (negative real shock), but the Fed uses monetary policy
to boost aggregate demand (positive AD shock)
C- A new type of automation technology is created, boosting
productivity (positive real shock). Some workers fear they'll lose
their jobs to automation, so consumer confidence falls (negative AD
shock).
D- The price of oil increases dramatically (negative real
shock). This makes consumers feel like their money doesn't spend as
well, so they don't spend as much (negative AD shock).
It is often the case that the economy is hit by both an AD and a real shock at the same time. This can make it difficult
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