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?

Short Answer

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The aggregate claim is the global claim of skimping for final wares and graces at a given away point of your time. Aggregate budget is the total quantum of ultimate goods and services that are supplied at the request of frugality in an exceedingly particular period of your time.

Step by step solution

01

Concept Introduction  

Affectedness is that shape of the frugality when the valuation of everything increases fleetly because of which joblessness and product of the frugality decrease.

02

Explanation of Solution 

The aggregate claim is the global claim of the frugality for final wares and services at a given point of your time. Aggregate force is the total quantum of ultimate goods and services that are supplied at the request of frugality in an exceedingly particular period of your time. The aggregate fruit of the wares will accelerate and the rate will lower because the aggregate reservoir arc shifts to the lowered because of the affectedness. the blend force wind and aggregate claim arc will cross one another at the upper affair and lower affectation.

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Most popular questions from this chapter

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.

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.

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.

Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), a measure of the price level; real compensation per hour (COMPRNFB); the nonfarm business sector real output per hour (OPHNFB), a measure of worker productivity; the price of a barrel of oil (MCOILWTICO); and the University of Michigan survey of inflation expectations (MICH). Use the frequency setting to convert the oil price and inflation expectations data series to "Quarterly," and

use the units setting to convert the price index to "Percent Change from Year Ago." Download all of the data into a spreadsheet, and convert the compensation and productivity measures to a single indicator. To do this, for each quarter, take the compensation number and subtract the productivity number. Call this difference "Net Wages Above Productivity."

a. Calculate the change in the inflation rate over the four most recent quarters of data available and the four quarters prior to that.

b. Calculate the changes in net wages above productivity, the price of oil, and inflation expectations 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 short-run aggregate supply curve.

Suppose the inflation rate remains relatively constant while output decreases and the unemployment rate increases. Using an aggregate demand and supply graph, show how this scenario is possible.

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