Question #3: a. If the money supply grows by 10 % every year, draw a line showin
ID: 1119364 • Letter: Q
Question
Question #3: a. If the money supply grows by 10 % every year, draw a line showing the effect on the aggregate demand curve and label it AD2. b. If the money supply has been growing by 10% per year for some time and the rate of inflation has been 10% for some time then the expected inflation rate would be From your answer in part (b) shift the aggregate Supply appropriately and label that line on the diagram SRAS2 c. d. Label the new equilibrium point, F on the diagram. e. Describe the new output at the equilibrium point. f. Describe the unemployment rate at the new equilibrium point. g. Describe the actual and expected inflation rates.Explanation / Answer
The new eqm F will be an intersection of AD2, LRAS, SRAS2
e. Our new output will be at yf or y (bar). since the intersetion is at AD2, LRAS, SRAS2
f. Since output is back at natural rate, Our unemployment will also be back at its natural rate. U= Un
g. Since, the growth rate of money is a constant @10% per year. So, from phillips curve we will have, since U = Un,
pi t = pi e t ,i.e expected inflation equals actual inflation ie. 10%