when short-run aggregate supply decrease, the real GDP decreases, the economy experiences recession. but the price level increases, the economy experiences inflation. What force can eventually pull the real GDP back up, equal to potential GDP, please decribe the situation. 3x
An increase in demand (for example, through an interest rate reduction, increase in government spending, or any other factor causing a positive AD shock) will push aggregate demand up, and the intersection of AS/AD will occur at potential GDP. The price level will be higher than it was before the creation of the recessionary gap.
Is this a question from Schweser or something? I would say that the causes of stagflation are usually some external problem that’s messing things up big time (stagflation in the '70’s was caused by Vietnam, oil crisis, dissolution of monetary union, Cold War, Peruvian fishery collapse). It’s not solved by any direct fiscal or monetary interventions, but by fixing the other problems. If you reduce it to the desert island scenario - Dharma doesn’t drop off any more food, the mango crop fails, and red tide kills all the fish. People are going to start paying more for any food because they need it and working less because they can’t work for hunger. No fiscal or monetary interevention is going to change that until the fish come back and the next mango crop works. (Also, in such a situation, the hoarders are usually hanged which means Hurley would be in trouble).
from the curriculum JoeyDVivre Wrote: ------------------------------------------------------- > Is this a question from Schweser or something? I > would say that the causes of stagflation are > usually some external problem that’s messing > things up big time (stagflation in the '70’s was > caused by Vietnam, oil crisis, dissolution of > monetary union, Cold War, Peruvian fishery > collapse). It’s not solved by any direct fiscal > or monetary interventions, but by fixing the other > problems. > > If you reduce it to the desert island scenario - > Dharma doesn’t drop off any more food, the mango > crop fails, and red tide kills all the fish. > People are going to start paying more for any food > because they need it and working less because they > can’t work for hunger. No fiscal or monetary > interevention is going to change that until the > fish come back and the next mango crop works. > (Also, in such a situation, the hoarders are > usually hanged which means Hurley would be in > trouble).
after i read through reading 26 inflation, i found this one time supply shock can lead to cost-push inflation if Fed takes the wrong action.