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Chapter 23: Q. 21 (page 618)

Suppose the president gets Congress to pass legislation that encourages investment in research and the development of new technologies. Assuming this policy leads: to a positive productivity change for the U.S. economy, use aggregate demand and supply analysis to predict the effects on inflation and output. Demonstrate these effects on a graph.

Short Answer

Expert verified

The following is a diagram depicting the impact of research and development spending on inflation and output:

Step by step solution

01

Step 1. Concept introduction

The term "investment in research and development" refers to money spent on activities aimed at improving existing products or developing new ones.

02

Step 2. Explanation

The following is a diagram depicting the impact of research and development spending on inflation and output:

Image Caption

Where in Figure 1,

- The long-run aggregate supply curve is abbreviated as LRAS.

- The aggregate supply curve is short (AS).

- The aggregate demand curve is AD.

Investment in research and development leads to advancements in technology, which has an impact on the aggregate supply curve in the long run. Both the long and short supply curves are shifted to the right as a result of this innovation and updated technology. With technical developments, productivity rises, resulting in lower inflation and higher output levels in the long run.

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Most popular questions from this chapter

Identify three factors that can shift the aggregate demand curve to the right and three different factors that can shift the aggregate demand curve to the left.

In its statement dated June 14,2017 , the Federal Open Market Committee indicated that inflation "is running somewhat below 2% . Go to http://research stlouisfed .org/fred2/, and click on the Series ID link "CPIAUCSL" (Consumer Price Index for All Urban Consumers: All Items-SA). Then click on the link "Percent Change from Year Ago." What has happened to the inflation rate since the time of the last reported value in Figure 16 ?

Suppose the public believes that a newly announced anti-inflation program will work and so lowers its expectations of future inflation. What will happen to aggregate output and the inflation rate in the short run?

In its statement dated June 14, 2017, the Federal Open Market Committee indicated that inflation “is running somewhat below 2%.” Go to http://research.stlouisfed .org/fred2/, and click on the Series ID link “CPIAUCSL” (Consumer Price Index for All Urban Consumers: All Items-SA). Then click on the link “Percent Change from Year Ago.” What has happened to the inflation rate since the time of the last reported value in Figure 16?

During 2017, some Fed officials discussed the possibility of increasing interest rates as a way of fighting potential increases in expected inflation. If the public came to expect higher inflation rates in the future, what would be the effect on the short-run aggregate supply curve? Use an aggregate demand and supply graph to illustrate your answer.
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