In the Keynesian framework, which of the following event might cause a recession? Which might cause inflation? Sketch AD/AS diagrams to illustrate your answers.
a. A large increase the price of the homes that people own.
b. Rapid growth in the economy of a major trading partner.
c. The development of a major new technology offers profitable opportunities for business.
d. The interest rate rises.
e. The good imported from a major trading partner become much less expensive.
Answer:
a. AD will shift to the right and may cause inflation if it goes beyond potential GDP.
b. AD will shift to the right and may cause inflation if it goes beyond potential GDP.
c. AD will shift to the right and may cause inflation if it goes beyond potential GDP.
d. AD will shift to the left and may cause recession if it goes beyond potential GDP.
e. Demand for cheaper imports increase reducing demand for domestic products. AD will shift to left and may be recessionary.
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