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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

Assume that the position of a nation's aggregate demand curve has not changed, but the long-run equilibrium price level has declined. Other things being equal, which of the following factors might account for this event?

a. An increase in labor productivity

b. A decrease in the capital stock

c. A decrease in the quantity of money in circulation

d. The discovery of new mineral resources used to produce various goods

e. A technological improvement

Take a look at the panel (b) of Figure 10-8. What change in the position of the aggregate demand curve could generate inflation-that is, an increase in the equilibrium price level? What type of variation in the quantity of money placed into circulation by the Federal Reserve could generate such a change in the position of the aggregate demand curve?

Suppose that the long-run aggregate supply curve is positioned at a real GDP level of $18trillion in base-year dollars, and the long-run equilibrium price level (in index number form) is 115 . What is the full-employment level of nominal GDP?

In Ciudad Barrios, El Salvador, the latest payments from relatives working in the United States have finally arrived. When the credit unions open for business, up to 150 people are already waiting in line. After receiving the funds their relatives have transmitted to these institutions, customers go off to outdoor markets to stock up on food or clothing or to appliance stores to purchase new refrigerators or televisions. Similar scenes occur throughout the developing world, as each year migrants working in higher-income, developed nations send around $200 billion of their earnings back to their relatives in less developed nations. Evidence indicates that the relatives, such as those in Ciudad Barrios, typically spend nearly all of the funds on current consumption.

a. Based on the information supplied, are developing countries' income inflows transmitted by migrant workers primarily affecting their economies' long-run aggregate supply curves or aggregate demand curves?

b. How are equilibrium price levels in nations that are recipients of large inflows of funds from migrants likely to be affected? Explain your reasoning.

As more of the nation's systems of river locks become deficient, what is happening to the pace at which the U.S. production possibilities curve shifts outward over time?
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