Question

True or False and why?

1. Most economists feel that zero inflation is to be preferred to even very low levels of inflation.
2. Gross Domestic Product measures the level of production that can be attributed to factors of production native to the country.
3. In both the Keynesian and Classical models the long-run aggregate supply curve is a vertical function at the level of “full” employment.
4. A major reason for the low inflation of the end of the 1990’s was the growth of worker productivity.

Answer 1

1. False. Zero inflation is never preferred to even very low levels of inflation. When workers get job and thus demand more due to increase in income, inflation is bound to increase. Thus there is a positive relation between growth and inflation. Exception is very low level of inflation in late 1990s but it never touched zero.

2. False. Gross Domestic Product refers to the level of production that occurs in the geographical boundary of the country but factors of production need not necessarily be native. Except land, other three factors of production such as labor, capital and enterpreneur may be native to foreign country. The only thing to be considered is that production takes place in home country.

3.True. long-run aggregate supply curve is determined through the equilibrium in labor market. Since in the long run, firms and workers have perfect information about market, the market clears at full employment level. The output is fixed from the supply side. Hence long-run aggregate supply curve is vertical line.

4.True. low inflation of the end of the 1990’s was an exception to the then prevalent theory of philips curve. It said that if an economy grows, unemployment decreases and inflation increases. However, if potential growth increases drastically then the economy grows without upward pressure on inflation. Also the potential growth increases if there is technological advancement which in turn increases the productivity of labor.