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.

Short Answer

Expert verified

The diagram showing, possibility of the scenario of a relatively constant inflation while output decreases and unemployment rate increases is as follows:

Where,

- LRAS is that the future aggregate supply curve.

- AS is that the short run aggregate supply curve.

- AD is that the aggregate demand curve.

- I represents inflation.

- Y represents output.

Step by step solution

01

Concept Introduction    

The speed at which general price index of products and services rise which ends within the decrease within the purchasing power of the economy is thought as inflation.

02

Explanation of Solution  

When the inflation is constant and unemployment rises, the combination demand and provide curve shift leftward to AD to AD1 and AS to AS1, respectively because because of unemployment, expenditure of consumer, level of investment and expenditure on net exports will decrease. This decrease in level of expenditures will cause the AD-AS curve to maneuver leftwards. If the combination demand curve and aggregate supply curve shifts leftward with same amount, then the rate remains constant but output level falls and unemployment increases briefly run.

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Most popular questions from this chapter

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.

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“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.

The financial crisis of 2007-2009 sent the United States into its worst recession since the end of World War II, with the unemployment rate rising to above 10%. Go to Federal Reserve Economic Data | FRED | St. Louis Fed (stlouisfed.org) and click on the Series ID link "UNRATE" (Civilian Unemployment Rate). What has happened to the unemployment rate since the time of the last reported value in Figure 16?

What happens to inflation and output in the short run and the long run when taxes decrease?

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