Question

Question 2

Suppose the economy is currently having an inflation expectation which equals to actual inflation. Explain how the output level will be affected in the short-run and long-run if there is a demand shock that drives the actual inflation to fall below expectation. (10%)

Answer 1

Answer:

•The real inflantation to fall underneath desires, there should be a negative interest stun in the economy.

In short run:

It will decrease in the genuine yield in the short run where price level will diminish.

•It very well may be because of the diminishing in riches, downturn in the economy or skeptical monetary viewpoint in the short run.

In long run:

•However, over the long haul, yield level, will be at the potential yield level, at a lower price level. It will occur, due to SRAS bend moving to one side, because of lower cost of creation as compensation rate diminishes with more individuals jobless in the short run.

•It occurs because of auto-modification instrument of the economy with no administration intercession.

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