Suppose that workers and firms perfectly forecast inflation, so that the real wage remains unchanged as...

 

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Suppose that workers and firms perfectly forecast inflation, so that the real wage remains unchanged as the price level rises over time. Prices and wages rise at the same rate, which implies that the real wage stays constant. The following graph shows the aggregate demand curve (AD) in an economy in long-run equilibrium. Assume the natural rate of unemployment is 4%, and potential output is $60 trillion. Use the orange points (square symbols) to draw the aggregate supply curve in this case, and use the black point (X symbol) to mark the equilibrium price level and real GDP. PRICE LEVEL 180 160 140 120 100 80 0 20 40 60 REAL GDP (Trillions of Dollars) 80 AD 100 Aggregate Supply Equilibrium Suppose that workers and firms perfectly forecast inflation, so that the real wage remains unchanged as the price level rises over time. Prices and wages rise at the same rate, which implies that the real wage stays constant. The following graph shows the aggregate demand curve (AD) in an economy in long-run equilibrium. Assume the natural rate of unemployment is 4%, and potential output is $60 trillion. Use the orange points (square symbols) to draw the aggregate supply curve in this case, and use the black point (X symbol) to mark the equilibrium price level and real GDP. PRICE LEVEL 180 160 140 120 100 80 0 20 40 60 REAL GDP (Trillions of Dollars) 80 AD 100 Aggregate Supply Equilibrium

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Now suppose the Federal Reserve increases the money supply Assume that an increase in the equ... View the full answer