How do fluctuations in aggregate demand and short-run aggregate supply bring fluctuations in real GDP around potential GDP?
What will be an ideal response?
Fluctuations in aggregate demand with no change in short-run aggregate supply bring fluctuations in real GDP around potential GDP. For instance, starting from full employment, a decrease in aggregate demand decreases the price level and real GDP and creates a recessionary gap. In the long run the money wage rate (and the money prices of other resources) falls so that short-run aggregate supply increases and the economy returns to its full employment equilibrium. Starting from full employment, a decrease in short-run aggregate supply decreases real GDP and raises the price level. The fall in real GDP combined with a rise in the price level is a phenomenon called stagflation.
You might also like to view...
Scarcity requires that we
A) produce efficiently. B) learn to limit our wants. C) have the most rapid economic growth possible. D) have unlimited resources. E) make choices about what goods and services to produce.
For each of the following policy options the government can undertake to make the debt sustainable, explain the economic consequences and the resulting change to potential GDP: a. increasing seigniorage b. increasing taxes on wages c
increasing taxes on capital income d. decreasing expenditure on government capital goods e. decreasing expenditure on transfer programs such as Social Security, Medicare, and Medicaid
Explain how the existence of discouraged workers alters the extent to which the official unemployment provides an accurate measure of the use of labor resources
What will be an ideal response?
If the U.S. Treasury is forced to sell bills and bonds to foreigners to finance deficits, this may ________ the price of bonds and ________ the interest rates on the bonds.
A. drive down; drive down B. drive up; drive up C. drive up; drive down D. drive down; drive up