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Chapter 10: Q.22 (page 230)

Consider panel (a) of Figure 10-8. What type of variation in the position of the long-run aggregate supply curve could generate inflation-that is, an increase in the equilibrium price level? In a nation that generally experiences economic growth over the long run, would we anticipate that such a change in the position of the long-run aggregate supply curve could explain persistent inflation?

Short Answer

Expert verified

A leftward shift in the total inventory bend from LRAS to LRAS2creates expansion in the economy. In a creating economy, expansion is brought about by higher total interest (AD).

Step by step solution

01

introduction

Any adjustment of the condition of creative innovation and the amount/nature of variable information sources causes the LRAS bend to move.

02

explanation part (1)

A negative change in the two elements would cause the LRAS bend to move leftwards. The downturn in the economy over the long haul prompts this negative development and pushes the Real GDP to bring down a level as shown by LRAS2 in the figure above.

03

explanation part (2)

This suggests that diminished ability or efficiency permits the economy to create labour and products at a lower level. The government use steps the rising way. This suggests that utilization, venture and government use expand in such an economy pushing the AD bend to AD2that is, a higher total interest level.

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Most popular questions from this chapter

In Figure 10-2, if the economy acquires a larger amount of capital goods in the current year, does a larger or smaller outward shift in the production possibilities curve result? Does the LRAS curve shift more or less far to the right? Why?

Take a look at the panel (b) of Figure 10-8. What change in the position of the aggregate demand curve could generate inflation-that is, an increase in the equilibrium price level? What type of variation in the quantity of money placed into circulation by the Federal Reserve could generate such a change in the position of the aggregate demand curve?

Identify the combined shifts in long-run aggregate supply and aggregate demand that could explain the following simultaneous occurrences,

a. An increase in equilibrium real GDP and an increase in the equilibrium price level

b. A decrease in equilibrium real GDP with no change in the equilibrium price level

c. An increase in equilibrium real GDP with no change in the equilibrium price level

d. A decrease in equilibrium real GDP and a decrease in the equilibrium price level

Explain how, if at all, each of the following events would affect equilibrium real GDP and the long run equilibrium price level.

a. A reduction in the quantity of money in circulation

b. An income tax rebate (the return of previously paid taxes) from the government to households, which they can apply only to purchases of goods and services

c. A technological improvement

d. A decrease in the value of the home currency in terms of the currencies of other nations

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?
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