In the long run, if a large sum of this money is invested properly, it could lea
ID: 1213997 • Letter: I
Question
In the long run, if a large sum of this money is invested properly, it could lead to long run growth and the LRS curve could shift from left to right. The employment will move from over-employment to a normal level and a rightward shift of the AD curve will be not along the short-run horizontal AS curve, but rather will be move over fixed on the long-run vertical AS curve. The effect will be a change in the price level à from P to P’, while employment will return to the normal level i.e., full employment.
A- During this period, people who monitor the U.S. economy were constantly on the lookout for signs of inflation. Explain why inflation may tend to arise when output is above the full-employment level and what the initial signs might be.
B- Throughout the late 1990s, the U.S. economy was characterized by steady, historically high rates of growth. In the past, such periods of growth have resulted in inflation, but as of the end of 1999 this inflation had not materialized. What must happen in an economy for output to expand in the short run without the price level increasing?
Explanation / Answer
Answer:
In the long-run, aggregate supply curve tends to be rigid, which implies that the output level stagnate with additional inputs, especially labor. Additional investments into the system where there is already full-employment increase the demand for goods and services. This will result in a outwards shift of the AD curve. However, since the AS curve is fixed at the maximum level, the only possible equilibrium is at a higher price. Therefore inflation is the likely result of additional investments at full-employment level.
The initial sign of inflation is the rise in the consumer price index and the stagnation of the index of industrial production. GDP growth peaks off and there will be pressure on the wage rate.
Answer:
The only way supply can increase without rise in prices is to reduce the cost of production. The US economy has witnessed an explosive growth during the 1990’s to early 2000. This was because of improvements in the services sectors which employed ICT methods to increase supply levels. Globalization of production methods and outsourcing of manufacturing to cheap-labor economies of the East have increased output without raising prices. In many cases innovation in off-shoring have actually cut the prices of production drastically.
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