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Chapter 10: Q. 6 (page 228)

Suppose that during the past $3$ years, equilibrium real GDP in a country rose steadily, from $450$ billion to $500$ billion, but even though the position of its aggregate demand curve remained unchanged, its equilibrium price level steadily declined, from $110$ to $103$ . What could have accounted for these outcomes, and what is the term for the change in the price level experienced by this country?

Short Answer

Expert verified

The term for the change within the indicator experienced by this country is secular deflation.

Step by step solution

01

Unchanged

It has been stated that even wrath no change in aggregate demand, real GDP of the country has increased whileindex has declined.
This phenomenon can only be observed if long-run aggregate supply curve of the economy shifts rightwards because only during this case, with aggregate demand remaining unchanged, a rise in GDP and a decline inindicator is experienced.

02

Secular deflation

The given country is experiencing a decline inindicant resulting froma rise in real GDP but no change in aggregate demand.
When persistent decline inindex is experiencedthanks to increase in real GDP (economic growth) while aggregate demand remains relatively unchanged then this decline inindex number is termed as secular deflation.
So, the term for the changewithin the indicator experienced by this country is secular deflation.

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Most popular questions from this chapter

Has China's production possibilities curve been shifting outward or inward were the past $40$ years? Explain your answer

Take a look at the panel (b) of Figure 10-6. If the Federal Reserve seeks to prevent secular deflation from taking place as a consequence of economic growth, how should it change the quantity of money in circulation? How would this policy action prevent secular deflation?

Consider the diagram below when answering the questions that follow.

a. Suppose that the current price level is $P_{2}$ . Explain why the price level will decline toward $P_{1}$ .

b. Suppose that the current price level is $P_{3}$ . Explain why the price level will rise toward $P_{1}$ .

Consider panel (a) of Figure 10-8. What type of variation in the position of the long-run aggregate supply curve could generate inflation-that is, an increase in the equilibrium price level? In a nation that generally experiences economic growth over the long run, would we anticipate that such a change in the position of the long-run aggregate supply curve could explain persistent inflation?

For each question, sщpose that the exonorm begins at the long-run equilibrium point $A$ in the diagram below. Identify which of the other points on the diagram-points $B, C, D$ , or $E$ -could represent a new long-run equilibrium after the described events take place and move the economy away from point $A$ .

a. Significant productivity improvements occur, and the quantity of money in circulation increases.

b. No new capital investment takes place, and a fraction of the existing capital stock depreciates and becomes unusable. At the same time, the government imposes a large tax increase on the nation's households.

c. More efficient techniques for producing goods and services are adopted throughout the economy at the same time that the government reduces its spending on goods and services.

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