The velocity of money the growth of real GDP technology Refer to the AD/As graph
ID: 1210376 • Letter: T
Question
The velocity of money the growth of real GDP technology Refer to the AD/As graph. It shows an economy at a long run equilibrium with real growth is 3 % and inflation is 4 %. Even if prices are stickly in the short run and the increase in AD is unexpected, what will be the outcome in the long run (assume the increase in AD is due to an increase in money growth? Inflation will tall back to the original expected inflation of 4 % and real growth will remain at 5% Inflation will increase to 7 % and real growth return to the rate of 3%. Inflation will increase to 7 % and real growth will increase to 10 % The Solow growth rate will become 5 % and the inflation rate will remain at 5%Explanation / Answer
b. Inflation will raise to 7% and the GDP growth rate will rate to 3%.
As AD shifts to the right in the short run , growth rate will be higher than the natural rate , then SRAS shifts to the left such that it AD where AD and LRAS are cutting , so growth rate returns ti intitial and unflation rises to 7%..
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