Question

In: Economics

Suppose the economy is currently having an inflation expectation which equals to actual inflation. Explain how...

Suppose the economy is currently having an inflation expectation which equals to actual inflation. Explain how the output level will be affected in the short-run and long-run if there is a demand shock that drives the actual inflation to fall below expectation.

Solutions

Expert Solution

If expected Inflation is at its actual inflation, economy is at point A.. Price at this level is P and output level is Y. Negative demand shock will shift aggregate demand curve from AD to AD1 in short run which educe the price level from P to P1 and output level to fall from Y to Y1 which drives inflation to fall below natural level of inflation.

As demand falls in short run, producers will reduce their supply to avoid inventories in long run which will shift the supply curve from AS to AS1 which will raise the price back to its initial level which takes inflation level to its initial level and cause output to fall further to Y2 level.

Rahul Sunny answered 2 years ago
Next > < Previous

Related Solutions

Suppose the economy is currently having an inflation expectation which equals to actual inflation. Explain how...
Suppose the economy is currently having an inflation expectation which equals to actual inflation. Explain how the output level will be affected in the short-run and long-run if there is a demand shock that drives the actual inflation to fall below expectation.
Suppose the economy is currently having an inflation expectation which equals to actual inflation. Explain how...
Suppose the economy is currently having an inflation expectation which equals to actual inflation. Explain how the output level will be affected in the short-run and long-run if there is a demand shock that drives the actual inflation to fall below expectation. (10%)
(b) Suppose the economy is initially above potential GDP, and the actual inflation rate is greater...
(b) Suppose the economy is initially above potential GDP, and the actual inflation rate is greater than the expected inflation rate. Use IS-LM model to explain what happens if the Bank Nagara (BNM) adjusts the interest rate to achieve the goal of price stability. (c) If economy is initially at full employment with real GDP to potential GDP. Use the IS-LM model to explain what happens if the economy experiences a recession both with and without automatic stabilizers.
Suppose the economy is currently in short run macroeconomic equilibrium, with actual GDP smaller than potential...
Suppose the economy is currently in short run macroeconomic equilibrium, with actual GDP smaller than potential GDP. (a) Depict this situation using AD-AS, being sure to label all curves and axes. (b) Give an example of an automatic stabilizer, and explain how it could close the gap this economy has. (c) What open market operation could the Federal Reserve carry out, to close this gap? Show graphically the effect it would have.
Describe and explain the inflation process the follows a period in which the economy is on...
Describe and explain the inflation process the follows a period in which the economy is on a​ short-run Phillips curve below the natural unemployment rate. (Short and simple)
Suppose an economy has been having very high inflation. The central bank has decided to decrease...
Suppose an economy has been having very high inflation. The central bank has decided to decrease the money supply in hopes of decreasing GDP (the thinking is that by decreasing GDP, it will lead to lower inflation – no need to make that connection, just focus on the goal of decreasing GDP). Using the complete Keynesian model, explain in as much detail as possible what will likely happen to the economy (including GDP, the interest rate, investment spending, any multiplier...
When the actual unemployment rate equals the natural rate of unemployment: Multiple Choice the economy has...
When the actual unemployment rate equals the natural rate of unemployment: Multiple Choice the economy has no discouraged workers. the economy is likely in a recession. the economy is only experiencing cyclical unemployment. the economy is at full employment.
Workers and employers in economy expected 3% inflation rate for 2015 but actual inflation turns out to be 5%. Kylie
Workers and employers in economy expected 3% inflation rate for 2015 but actual inflation turns out to be 5%. Kylie, a casual worker with no labour contract, has remained unaffected while Susie, a fixed term employee, has become worse-off.
Suppose that the natural rate of unemployment equals 6%, and the public expect inflation to equal...
Suppose that the natural rate of unemployment equals 6%, and the public expect inflation to equal 4 %, and the coefficient a in PC equation = 0.4. What is the unemployment rate when the actual inflation equals 2%? What if the actual inflation rate equals 10%? During the 1990s, we observed the co-existence of low inflation and low unemployment. One of the arguments given by macroeconomists is that the expected inflation was lower than usual during the 1990s. Suppose now...
Suppose the economy is initially in long-run equilibrium and experiences a favourable inflation shock. a) Explain...
Suppose the economy is initially in long-run equilibrium and experiences a favourable inflation shock. a) Explain how the SRAS line is affected in the short-run. b) Use your result for part (a) along with the AD-AS diagram to illustrate and explain what will happen to output and inflation in both the short-run and the long-run if the Reserve Bank accommodates the favourable inflation shock. c) Use your result for part (a) along with the AD-AS diagram to illustrate and explain...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT