Question

Suppose a bout of severe weather drives up agricultural costs, increases the costs of transporting goods and services, and increases the costs of producing goods and services in this economy.
The short-run economic outcome resulting from the increase in production costs is known as______. Now suppose that the government decides not to take any action in response to the short-run economic impact of the higher oil prices. In the long run, when the government does nothing, the output in the economy will be $______billion and the price level will be________.

Answer 1

Answer:

a) Stagflation

b)$110 billion

c) $110

Explanation:

Your question was incomplete as it lacked the relevant graph so I have attached it to this answer.

The short-run economic outcome resulting from the increase in production costs is known as__STAGFLATION____.

Stagflation refers to a situation where the Economy simultaneously goes through both Inflation and Stagnation.

Inflation in that prices rise and Stagnation in the production of goods due to high costs of production.

In the long run, when the government does nothing, the output in the economy will be $__110____billion and the price level will be___$110_____.

The question states that effects on the Natural level of output should be ignored. The Natural Level of Output is the quantity that the Economy produces in the long run with all resources being used optimally. This means that regardless of Government intervention, the point where the Aggregate Demand Curve intersects the Long Run Supply Curve will give the price of $110 and as the Long Run Supply Curve is at $110 billion, that is the rate of Output in the economy in the long run.