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AD-AS diagram

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**Consider the following series of shocks to the U.S. economy and show the effects in an AD-AS diagram (using an upward-sloping short-run aggregate supply curve). Be sure to label the curves clearly.

--Shock 1: An increase in the costs of fringe benefits because of the rising cost of providing health insurance to employees
--Shock 2: A bubble in the housing market that bursts
--Shock 3: A recession in the euro zone

Solution Preview

Shock 1: An increase in the costs of fringe benefits because of the rising cost of providing health insurance to employees.

This is a typical cost shock to the economy. An increase in the fringe benefits will raise the cost to manufacture the goods and therefore the total amount produced at any price level will be lower. This will shift the short-run AS curve to the left, and the short-run equilibrium will shift to the left with lower equilibrium ...

Solution Summary

AD-AS diagram is illustrated.

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