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Chapter 23: Q 7. (page 617)

鈥淚f prices and wages are perfectly flexible, then and changes in aggregate demand have a smaller effect on output.鈥� Is this statement true, false, or uncertain? Explain your answer.

Short Answer

Expert verified

The statement is false.

Step by step solution

01

Step 1. Define aggregate demand.

Aggregate demand is defined as the total amount of demand produced in the economy for all finished goods and services.

02

Step 2. Is the given statement true, false or uncertain?

The sensitivity of inflation to the output gap is symbolized by the symbol 纬. If wages and prices are completely flexible, 纬 will be quite large, indicating a high degree of sensitivity. Changes in aggregate demand would have a tremendous influence on output since aggregate demand is so sensitive.

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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.

Are there any 鈥済ood鈥� supply shocks? Explain.

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 factors led to decreases in both the unemployment and inflation rates in the 1990s?

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.
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