Question

Suppose that over a 30-year period Buskerville’s price level increased from 72 to 138, while its real GDP rose from \(1.2 trillion to \)2.1 trillion. Did economic growth occur in Buskerville? If so, by what average yearly rate in percentage terms (rounded to one decimal place)? Did Buskerville experience inflation? If so, by what average yearly rate in percentage terms (rounded to one decimal place)? Which shifted rightward faster in Buskerville: its long-run aggregate supply curve (ASLR) or its aggregate demand curve (AD)?

Short answer

Yes, economic growth has occurred in Buskerville as the growth rate has increased in 30 years by an average yearly rate of 2.5%.

Yes, Buskerville has experienced inflation in 30 years with an average yearly rate of 3.05%.

The rightward shift in the aggregate demand curve is faster than the rightward shift in the long-run aggregate supply curve.

Step-by-step solution

The calculation of economic growth rate

Economic growth refers to the increase in the value of real GDP in the economy.

In 30 years, the real GDP rose from $1.2 trillion to $2.1 trillion. Since there is a rise in the value of real GDP, it can be inferred that economic growth has occurred in Buskerville in 30 years.

The growth rate in Buskerville in 30 years is:

$$\begin{gathered} growthrate=\left(\frac{Y_1-Y_0}{Y_0}\right)\times 100 \\ =\left(\frac{2.1-1.2}{1.2}\right)\times 100 \\ =0.75\times 100 \\ =75\% \end{gathered}$$

The average yearly growth rate in Buskerville is:

localid="1643008213215" $$\begin{gathered} \mathrm{yearly}\mathrm{growth}\mathrm{rate}=\frac{\mathrm{growth}\mathrm{rate}}{\mathrm{no}.\mathrm{of}\mathrm{years}} \\ =\frac{75}{30} \\ =2.5\% \end{gathered}$$

The average yearly growth rate in Buskerville is 2.5%.

The calculation of inflation rate

Inflation refers to the increase in the price level over the years.

In 30 years, the price level rose from 72 to 138. Since there is a rise in the value of the price level, it can be inferred that inflation has occurred in Buskerville in 30 years.

The inflation rate in Buskerville in 30 years is: $$\begin{gathered} inflationrate=\left(\frac{P_1-P_0}{P_0}\right)\times 100 \\ =\left(\frac{138-72}{72}\right)\times 100 \\ =0.9166\times 100 \\ =91.66\% \end{gathered}$$

The average yearly inflation rate in Buskerville is:

$$\begin{gathered} \mathrm{yearly}\mathrm{inflation}\mathrm{rate}=\frac{\mathrm{inflation}\mathrm{rate}}{\mathrm{no}.\mathrm{of}\mathrm{years}} \\ =\frac{91.66}{30} \\ =3.05\% \end{gathered}$$

The shift in the curve

The rightward shift of the aggregate demand (AD) curve would lead to an increase in both price level and output level. So it would have an inflationary impact on the economy. Conversely, the rightward shift of the long-run aggregate supply (ASLR) curve would lead to a decrease in price level and an increase in output level. So it would have a deflationary impact on the economy.

The average yearly growth rate is 2.5%, and the average yearly inflation rate is 3.05% in Buskerville. So here, the inflation rate is higher than the economic growth rate. Hence, it can be inferred that the rightward shift in the AD curve dominates the rightward shift in the ASLR curve.