007 Aggregate Demand, Aggregate Supply Exercise

Use the following data if there is no inflation the

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Unformatted text preview: data: If there is no inflation, the price level is unchanged: . This requires sufficient unemployment to keep the real wage in the wage-setting equation equal to the real wage from the price-setting equation. Confirm that the required unemployment rate is . To obtain AS, substitute for the wage in the price-setting equation, using the wage-setting equation, and use and : This is the AS curve. Confirm the two given answers below and complete the remaining rows: 9,000 450 9,200 9,400 9,500 9,520 476 10% 4.8% 1,000 60 100 100 100 100 2,083 125 100 4. Look at for each price level in the AD table and look at for each level of output in the AS table. What is the combination in the present period that equilibrates the goods market and the money market, and satisfies both the wage-setting and price-setting equations? Is this equilibrium price level above or below last period’s price level ? Is the unemployment rate above or below the ‘natural’ or ‘non-inflationary rate’ ? What will happen to the whole AS schedule in the next period when last period’s price level in the AS equation is set equal to ? The assumption that the price level can fall, pulling the AS schedule down along an unchanged AD schedule is the basis for a ‘do nothing and wait for the economy to fix itself’ solution. What are two reasons for thinking that the AD curve may not stay in place to allow a downward shifting AS schedule to take the economy gradually to the natural rate of output?...
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