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Chapter 24: Q. 53 (page 603)

The AD/AS model is static. It shows a snapshot of the economy at a given point in time. Both economic growth and inflation are dynamic phenomena. Suppose economic growth is 3% per year and aggregate demand is growing at the same rate. What does the AD/AS model say the inflation rate should be?

Short Answer

Expert verified

Economic growth is a positive indication since it means the economy is heading in the right direction.

Step by step solution

01

Step1. Introduction

Inflation is a quantitative economic measure of the rate of change in the prices of particular commodities and services over time.

02

Step2. Explanation

Since this economy is increasing at 3% per year, demand for products and services will rise. Economic growth is a positive indication since it means the economy is heading in the right direction.

Assuming that aggregate supply remains constant, a rise in AD will only result in a price increase, resulting in inflation. As supply will be restricted and demand will rise, the price level will only rise, resulting in inflation.

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Most popular questions from this chapter

Suppose, after five years of sluggish growth, the European Union's economy picks up speed. What would be the likely impact on the U.S. trade balance, GDP, and employment?

How is cyclical unemployment illustrated in an AD/AS model?

The short-run aggregate supply curve was constructed assuming that as the price of outputs increases, the price of inputs stays the same. How would an increase in the prices of important inputs, like energy, affect aggregate supply?

Does Say鈥檚 law apply more accurately in the long run or the short run? What about Keynes鈥� law?

Table 24.4describes Santher's economy.

a. Plot the AD/AS curves and identify the equilibrium.

b. Would you expect unemployment in this

economy to be relatively high or low?

c. Would you expect prices to be a relatively large

or small concern for this economy?

d. Imagine that input prices fall and so AS shifts

to the right by 150units. Identify the new

equilibrium.

e. How will the shift in AS affect the original

output, price level, and employment?
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