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Chapter 23: Q.11 (page 618)

When aggregate output is below the natural rate of output, what happens to the inflation rate over time if the aggregate demand curve remains unchanged? Why?

Short Answer

Expert verified

If the combination affair remains below the implicit affair. The stipend of the labor will increase at slower pace and affectation will drop within the request.

Step by step solution

01

Concept Introduction 

The aggregate claim is the common claim of the frugality for the latest wares and graces at a given away point of your moment. The aggregate fund is the entire measure of last wares and graces that are supplied into the call of frugality in an exceedingly particular monthly of your moment.

02

Explanation of Solution   

Also severance are above the natural rate because of which there'll be lack of labor within the request, If the combination affair remains below the implicit affair. The stipend of the labor will increase at slower pace and affectation will drop within the request. As a result, anticipated affectation will go right down to that period and thanks to which aggregate force wind will shift to downcast. the combination force wind will shift to the downcast continuously until the quantum of affair increase to the implicit affair and reaches to equilibrium within the long term.

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Most popular questions from this chapter

“The appreciation of the dollar from 2012 to 2017 had a negative effect on aggregate demand in the United States.” Is this statement true, false, or uncertain? Explain your answer.

In what ways is the Volcker disinflation considered a success? In what ways is it considered a failure?

The Problems update with real-time data in My Lab Economics and are available for practice or instructor assignment.

1. Go to the St. Louis Federal Reserve FRED database, and find data on real government spending (GCEC1), real GDP (GDPC1), taxes (WO06RC1 Q 027 SBEA), and the personal consumption expenditure price index (PCECTPI), a measure of the price level. Download all of the data into a spreadsheet, and convert the tax data series into real taxes. To do this, for each quarter, divide taxes by the price index and then multiply by 100 .

a. Calculate the level change in real GDP over the four most recent quarters of data available and the four quarters prior to that.

b. Calculate the level change in real government spending and real taxes over the four most recent quarters of data available and the four quarters prior to that.

c. Are your results consistent with what you would expect? How do your answers to part (b) help explain, if at all, your answer to part (a)? Explain using the IS and A D curves.

If the unemployment rate is above the natural rate of unemployment, holding other factors constant, what will happen to inflation and output?

If large budget deficits cause the public to think there will be higher inflation in the future, what is likely to happen to the short-run aggregate supply curve when budget deficits rise?
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