Suppose that during the past 3years, equilibrium real GDP in a country rose steadily, from 450 billion to500 billion, but even though the position of its aggregate demand curve remained unchanged, its equilibrium price level steadily declined, from 110to 103. What could have accounted for these outcomes, and what is the term for the change in the price level experienced by this country?

Short Answer

Expert verified

The term for the change within the indicator experienced by this country is secular deflation.

Step by step solution

01

Unchanged

It has been stated that even wrath no change in aggregate demand, real GDP of the country has increased whileindex has declined.
This phenomenon can only be observed if long-run aggregate supply curve of the economy shifts rightwards because only during this case, with aggregate demand remaining unchanged, a rise in GDP and a decline inindicator is experienced.

02

Secular deflation

The given country is experiencing a decline inindicant resulting froma rise in real GDP but no change in aggregate demand.
When persistent decline inindex is experiencedthanks to increase in real GDP (economic growth) while aggregate demand remains relatively unchanged then this decline inindex number is termed as secular deflation.
So, the term for the changewithin the indicator experienced by this country is secular deflation.

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Most popular questions from this chapter

Take a look at the panel (a) of Figure 10-6. In the absence of a change in aggregate demand, what effect does economic growth have on the price level over time, other things being equal? Why?

10-13. Explain whether each of the following events would cause a movement along or a shift in the ADcurve, other things being equal. In each case, explain the direction of the movement along the curve or shift in its position.

a. Deflation has occurred during the past year.

b. Real GDP levels of all the nation's major trading partners have declined.

c. There has been a decline in the foreign exchange value of the nation's currency,

d. The price level has increased this year.

Take a look at the panel (b) of Figure 10-6. If the Federal Reserve seeks to prevent secular deflation from taking place as a consequence of economic growth, how should it change the quantity of money in circulation? How would this policy action prevent secular deflation?

Assume that the position of a nation's aggregate demand curve has not changed, but the long-run equilibrium price level has declined. Other things being equal, which of the following factors might account for this event?

a. An increase in labor productivity

b. A decrease in the capital stock

c. A decrease in the quantity of money in circulation

d. The discovery of new mineral resources used to produce various goods

e. A technological improvement

How could a return of the U.S. population growth rate to its previous level reduce the disinflationary effect of secular stagnation?

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