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Chapter 10: Q. 6 (page 228)

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?

Short Answer

Expert verified

The term for the change within the indicator experienced by this country is secular deflation.

Step by step solution

01

Unchanged

It has been stated that even wrath no change in aggregate demand, real GDP of the country has increased whileindex has declined.
This phenomenon can only be observed if long-run aggregate supply curve of the economy shifts rightwards because only during this case, with aggregate demand remaining unchanged, a rise in GDP and a decline inindicator is experienced.

02

Secular deflation

The given country is experiencing a decline inindicant resulting froma rise in real GDP but no change in aggregate demand.
When persistent decline inindex is experiencedthanks to increase in real GDP (economic growth) while aggregate demand remains relatively unchanged then this decline inindex number is termed as secular deflation.
So, the term for the changewithin the indicator experienced by this country is secular deflation.

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Most popular questions from this chapter

Suppose that the position of a nation's long-run aggregate supply curve has not changed, but its long-run equilibrium price level has increased. Which of the following factors might account for this event?

a. A rise in the value of the domestic currency relative to other world currencies

b. An increase in the quantity of money in circulation

c. An increase in the labor force participation rate

d. A decrease in taxes

e. A rise in real incomes of countries that are key trading partners of this nation

f. Increased long-run economic growth

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

10-13. Explain whether each of the following events would cause a movement along or a shift in the ADcurve, other things being equal. In each case, explain the direction of the movement along the curve or shift in its position.

a. Deflation has occurred during the past year.

b. Real GDP levels of all the nation's major trading partners have declined.

c. There has been a decline in the foreign exchange value of the nation's currency,

d. The price level has increased this year.

Explain whether each of the following events would cause a movement along or a shift in the position of the L.RAS curve, other things being equal. In each case, explain the direction of the movement along the curve or shift in its position.

a. Last year, businesses invested in new capital equipment, so this year the nation's capital stock is higher than it was last year.

b. There has been an 8 percent increase in the quantity of money in circulation that has shifted the ADcurve.

c. A hurricane of unprecedented strength has damaged oil rigs, factories, and ports all along the nation's coast.

d. Inflation has occurred during the roast year as a result of rightward shifts of theAD curve.

This year, a nation's long-run equilibrium real GDP and price level both increased. Which of the following combinations of factors might simultaneously account for botb occurrences?

a. An isolated earthquake at the beginning of the year destroyed part of the nation's capital stock, and the nation's government significantly reduced its purchases of goods and services.

b. There was a technological improvement at the end of the previous year, and the quantity of money in circulation rose significantly during the year.

c. Labor productivity increased throughout the year, and consumers significantly increased their total planned purchases of goods and services.

d. The capital stock increased somewhat during the year, and the quantity of money in circular. tion declined considerably.
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