##PLEASE EXPLAIN YOUR ANSWERS## (Figure: Two SRAS Curves) The figure shows the A
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Question
##PLEASE EXPLAIN YOUR ANSWERS##
(Figure: Two SRAS Curves) The figure shows the AD-AS model with two SRAS curves. Which of the following is TRUE of Point A?
A. The actual inflation rate is 3%, and the expected inflation rate is 5%.
B. The actual inflation rate and the expected inflation rate are both 3%.
C. The actual inflation rate and the expected inflation rate are both 5%.
D. The actual inflation rate is 5%, and the expected inflation rate is 3%.
Question 14
If the growth rate of spending increases from 3% to 5%, then:
A. the slope of the aggregate demand curve will increase.
B. the inflation rate will rise 2%.
C. the aggregate demand curve will shift to the right.
D. the growth rate of real output will rise 2%.
The long-run aggregate supply curve is represented by a vertical line at the Solow growth rate because:
A. growth is affected by changes in the money supply in the long run.
B. growth depends on the rate of inflation in the long run.
C. growth is not affected by the factors of production.
D. there is an underlying assumption of long-run money neutrality.
Explanation / Answer
Given diagram related to the AD-AS Model of the economy. We have been given 2 SRAS, on a particular SRAS, expected inflation remains the same, throught each point on the curve. Thus if we take SRAS1 Expected Inflation at point A and B will be the same which is 5% and for SRAS2 , the expected inflation at point D and point C is same and equal to 3%.
1. Which of the following is TRUE of Point A?
We can see that at point A, Real inflation rate, given by the y-axis is 5% and the expected rate of inflation by the agents in the economy is also 5%. Thus option C is True option regarding A.
2. If the growth rate of spending increases from 3% to 5%, then:
There are various factors which mainly determines the shift of the Aggregate Demand Curve. Slope of the AD curve is only affected by one factor which is price. Thus if there is growth in spending rates, the AD curve should show a rightward shift for the model. Thus option C seems True.
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