Macroeconomics 1st Edition by Dean Karlan,Jonathan Morduch

Exercise 16

For questions 13-16, use an AD/AS model to answer the following questions. In each case assume the economy starts in long- and short-run equilibrium, and show the appropriate shifts in the AS or AD curves.
Suppose a summer of perfect weather in the Midwest leads to record harvests of corn, wheat, and soybeans.
a. What happens to price levels and output in the U.S. in the short run?
b. Suppose the government takes no action to help the economy. Show what happens to price levels and output in the long run.
c. If the U.S. government reacts to the record harvests by increasing taxes or decreasing spending, what happens to price levels and output in the long run?
d. What is the problem associated with the government reacting to the record harvests by increasing taxes or decreasing spending?