How might real business cycle theorists respond to evidence of procyclical inflation?
What will be an ideal response?
Since the aggregate demand curve is negatively-sloped, changes in potential output should relate negatively to inflation. Rising potential (actual) output should put downward pressure on prices, while negative productivity shocks should force prices up. Defenders of real business cycle theory may point to evidence that inflation is not consistently procyclical. Also, if aggregate demand shifts are correlated with changes in potential output, that might account for procyclical changes in inflation.
You might also like to view...
According to the text, approximately what percentage of U.S. net public debt is held by foreign residents?
A) 50% B) 20% C) 90% D) 800%
In the above table, the marginal product is greatest when the
A) first worker is hired. B) second worker is hired. C) third worker is hired. D) fourth worker is hired.
Like a perfect competitor, a monopolistic competitor:
a. produces where price equals marginal cost. b. produces a homogeneous product. c. earns zero economic profit in the long run. d. earns zero economic profit in the short run.
The self-correcting mechanism would be expected to be very rapid in an economy with
A. a large multiplier. B. flexible prices. C. rigid wages. D. high labor productivity.