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Chapter 23: Q.11 (page 618)

When aggregate output is below the natural rate of output, what happens to the inflation rate over time if the aggregate demand curve remains unchanged? Why?

Short Answer

Expert verified

If the combination affair remains below the implicit affair. The stipend of the labor will increase at slower pace and affectation will drop within the request.

Step by step solution

01

Concept Introduction 

The aggregate claim is the common claim of the frugality for the latest wares and graces at a given away point of your moment. The aggregate fund is the entire measure of last wares and graces that are supplied into the call of frugality in an exceedingly particular monthly of your moment.

02

Explanation of Solution   

Also severance are above the natural rate because of which there'll be lack of labor within the request, If the combination affair remains below the implicit affair. The stipend of the labor will increase at slower pace and affectation will drop within the request. As a result, anticipated affectation will go right down to that period and thanks to which aggregate force wind will shift to downcast. the combination force wind will shift to the downcast continuously until the quantum of affair increase to the implicit affair and reaches to equilibrium within the long term.

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Most popular questions from this chapter

The financial crisis of 2007-2009 sent the United States into its worst recession since the end of World War II, with the unemployment rate rising to above 10%. Go to Federal Reserve Economic Data | FRED | St. Louis Fed (stlouisfed.org) and click on the Series ID link "UNRATE" (Civilian Unemployment Rate). What has happened to the unemployment rate since the time of the last reported value in Figure 16?

The Problems update with real-time data in My Lab Economics and are available for practice or instructor assignment.

1. Go to the St. Louis Federal Reserve FRED database, and find data on real government spending (GCEC1), real GDP (GDPC1), taxes (WO06RC1 Q 027 SBEA), and the personal consumption expenditure price index (PCECTPI), a measure of the price level. Download all of the data into a spreadsheet, and convert the tax data series into real taxes. To do this, for each quarter, divide taxes by the price index and then multiply by 100 .

a. Calculate the level change in real GDP over the four most recent quarters of data available and the four quarters prior to that.

b. Calculate the level change in real government spending and real taxes over the four most recent quarters of data available and the four quarters prior to that.

c. Are your results consistent with what you would expect? How do your answers to part (b) help explain, if at all, your answer to part (a)? Explain using the IS and A D curves.

During 2017 , some Fed officials discussed the possibility of increasing interest rates as a way of fighting potential increases in expected inflation. If the public came to expect higher inflation rates in the future, what would be the effect on the short-run aggregate supply curve? Use an aggregate demand and supply graph to illustrate your answer.

Suppose the inflation rate remains relatively constant while output decreases and the unemployment rate increases. Using an aggregate demand and supply graph, show how this scenario is possible.

Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), a measure of the price level; real compensation per hour (COMPRNFB); the nonfarm business sector real output per hour (OPHNFB), a measure of worker productivity; the price of a barrel of oil (MCOILWTICO); and the University of Michigan survey of inflation expectations (MICH). Use the frequency setting to convert the oil price and inflation expectations data series to "Quarterly," and

use the units setting to convert the price index to "Percent Change from Year Ago." Download all of the data into a spreadsheet, and convert the compensation and productivity measures to a single indicator. To do this, for each quarter, take the compensation number and subtract the productivity number. Call this difference "Net Wages Above Productivity."

a. Calculate the change in the inflation rate over the four most recent quarters of data available and the four quarters prior to that.

b. Calculate the changes in net wages above productivity, the price of oil, and inflation expectations over the four most recent quarters of data available and the four quarters prior to that.

c. Are your results consistent with what you would expect? How do your answers to part (b) help explain, if at all, your answer to part (a)? Explain using the short-run aggregate supply curve.
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