Explained using aggregate supply and aggregate demand curves

Reference no: EM13875167

If someone could add to my conclusion, and any more information added could come with a nice tip, thanks.

Macropoland has a natural rate of unemployment at about 4.5% and its long run average of inflation over time has been about 2%. This means that no matter what happens in the short-run, the long-run averages of unemployment and inflation will always be about 4.5% and 2%. During the time period 1973-1974, the unemployment and inflation rates both rose significantly. In present time, the inflation rate is lower than the long run average inflation rate, and the unemployment rate is greater than the natural rate. Changes during these different time periods may be explained using aggregate supply and aggregate demand curves.

During the time period 1973-1974, Macropoland went through a deep recession where the value of their dollar rose and output increased. The inflation rate caused a general rise in the price level, which consequently causes the demand curve to move to the right. This means that the prices of items will increase and consequently people will demand less of each item. In addition, the unemployment rate increased which could be due to a decrease in the output needed. When the output rate falls below the natural rate of output, the employment rate suffers as seen in Macropoland.

In present time, the unemployment rate is at 9% and the inflation rate is at .4%. Macropoland is also experiencing very sluggish consumption and investment due to a fall in the housing market. The fall in the housing market caused the price level to fall below the expected price level and caused the rate of output to fall below the natural rate of output. This caused the unemployment rate to rise above the natural rate of unemployment in the short run.

According to aggregate demand and aggregate supply, while the price level may change, the unemployment and inflation rate will always return to their natural rates. Different events may trigger short-run changes but these changes will always return to their natural rate in the long run. The present inflation and unemployment rate should eventually return closer to their natural rates because short-run effects are different from long-run effects.

Reference no: EM13875167

Questions Cloud

What is the least you could pay to acquire bond : A Treasury issue is quoted at 107:17 bid and 107:31 ask. Assume a face value of $1,000. What is the least you could pay to acquire a bond?

What motivates policymakers to stimulate the economy : What motivates policymakers to stimulate the economy or contract the economy? Based on your research, what does the Federal Reserve say about its policy goals? What does the Federal Reserve say about the strength of the economy?

Considering new office computer system : The L Company is considering a new office computer system. They can purchase the system for $21,000. If the computer system is purchased, it will be depreciated straight line over a five year life to a zero salvage value. L Company's before tax cost ..

Local acceleration of gravity : If the density of the water is 62.4 lb/ft3, what is the mass of water stored in the tower, in lb, when the tank is full? What is the weight, in lbf, of the water if the local acceleration of gravity is 32.1 ft/s2?

Explained using aggregate supply and aggregate demand curves : Macropoland has a natural rate of unemployment at about 4.5% and its long run average of inflation over time has been about 2%. This means that no matter what happens in the short-run, the long-run averages of unemployment and inflation will always b..

Calculate the break-even after-tax yearly lease payment : If the after-tax present value of buying equipment and using it for six years is $125,000, calculate the break-even after-tax yearly lease payment (seven payments) using a 8% real discount rate. (Assume that lease payments are made at the beginning o..

What is the call premium of the bond : You own a bond with a 6.3 percent coupon rate and a yield to call of 7.2 percent. The bond currently sells for $1,105. If the bond is callable in five years, what is the call premium of the bond?

Vidalia company reported revenues : For the current year, Vidalia Company reported revenues of $250,000 and expenses of $225,000.

What is the discounted payback period for these cash flows : An investment project has annual cash inflows of $4,300, $4,000, $5,200, and $4,400, and a discount rate of 13 percent. What is the discounted payback period for these cash flows if the initial cost is $7,900?

User Account

All Pages