Use the following information for the next 9 questions. You should draw a graph
ID: 1195942 • Letter: U
Question
Use the following information for the next 9 questions. You should draw a graph that depicts the situation below and use your picture to answer the questions.
Assume that wages and prices are sticky and that we start at a long-run equilibrium.Assume that at this initial point, the growth rate of the money supply is 6%, the growth rate of the velocity of money is 2% and that the real economic growth rate is 4%.
Now assume that oil prices increase. After the increase in oil prices, the inflation rate in the economy is 9%. Now assume that the federal government decides to increase government spending in order to combat the rise in oil prices. After the increase in government spending the total spending growth is now 14%.
1. After the increase in oil prices (point 2), what is the level of expected inflation for the SRAS curve?
2. After the increase in oil prices (point 2), what is the the real economic growth rate?
Explanation / Answer
1. After the increase in oil prices, the level of expected inflation is higher than the actual inflation of 9%. This is because in the long run, the short run aggregate supply curve has to come back to its original position, and for that to happen, the acutal inflation rate must be lower than the expected inflation rate.
2. Total spending growth = inflation rate + real-output growth rate
14% = 9% + real output growth rate
Real output growth rate = 5%