Assume that the economy reaches natural unemployment, but demand keeps increasin

Question

Assume that the economy reaches natural unemployment, but demand keeps increasing and we experience inflation in the 7%-10% annual range. 2. Explain, how neo classical economists would address this situation. Using the 3 tools of monetary fiscal policy, explain how each of these tools could be used to correct this situation. a. b. Grading Rubric: Each question worth 11 Points Accuracy of answer: 5 Points each Quality of analysis 6 Points each Overall 6 points on entire assignment for grammar, coherence, lack of typos.

Explanation / Answer

a)  

Neoclassical does not believe in government intervention in economic actvities in long run. Government intervention in long run would result into the inflationary pressures only.

Hence, there must be fall in aggregate demand to decrease inflation rate. government reduces its expenditure in long so the Aggregate demand (AD) can be reduced further to rein in inflation.

b)

Following are tools that can be used to control inflation:

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