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Unformatted text preview: potential GDP. e) There is a boom in the economy. The IA line will shift up until real GDP equals potential GDP, for similar reasons as the question above. 2. Suppose the economy is initially at potential GDP. a. Draw an aggregate-demand curve and inflation-adjustment line, and label the initial equilibrium with an A . b. Suppose there is a change in monetary policy that aims to increase the rate of inflation (from the current rate). Illustrate the short-run effect on your diagram. Label the new equilibrium with a B . c. Illustrate the medium-run effect of the change on your diagram, and label the medium-run equilibrium with a C . d. Illustrate the long-run effect of the change on your diagram, and label the long-run equilibrium with a D. e. Is the rate of inflation at point D higher or lower than at point A?...
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- Fall '10