An important part of understanding U.S. inflation in the 1970s is that the growth of potential...
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An important part of understanding U.S. inflation in the 1970s is that the growth of potential output decreased in the early 1970s. a) Use the AS/AD framework to explain how a decrease in potential GDP affects inflation and short-run output if the Fed uses the simple monetary policy rule. b) Suppose the Fed uses the monetary policy rule but judges whether potential output has been reached by looking at the unemployment rate. If the natural rate of unemployment increases when the growth rate of potential output falls, explain how the Fed's policy can lead to rising inflation. You will need use sentences to explain this; use graphs or equations when helpful. An important part of understanding U.S. inflation in the 1970s is that the growth of potential output decreased in the early 1970s. a) Use the AS/AD framework to explain how a decrease in potential GDP affects inflation and short-run output if the Fed uses the simple monetary policy rule. b) Suppose the Fed uses the monetary policy rule but judges whether potential output has been reached by looking at the unemployment rate. If the natural rate of unemployment increases when the growth rate of potential output falls, explain how the Fed's policy can lead to rising inflation. You will need use sentences to explain this; use graphs or equations when helpful.
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a In the ASAD framework a decrease in potential GDP would shift the longrun aggregate supply LRAS curve to the left This shift indicates a reduction i... View the full answer
Related Book For
Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young
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