Explaining full employment equilibrium

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1. Could we ever achieve an unemployment rate below full employment? What problems might we encounter if we did?

2. Why might inflation accelerate as the unemployment rate declines?

3. Which of the following people would we expect to be hurt by an increase in the rate of inflation from 3 percent to 6 percent?

a. A homeowner with a $50,000 fixed rate mortgage on his home

b. A retired person who receives a monthly pension of $500 from her former employer

c. An automobile worker with a cost of living provision in his employment contract

d. A wealthy individual who owns corporate bonds that pay her an interest rate of 8 percent per year

4. What factors might cause a rightward shift of the aggregate demand curve? What might induce a rightward shift of aggregate supply? Briefly explain why the factors would cause the rightward shift.

5. Illustrate (Draw the graph) the following events with AS and AD shifts. Start with the initial graph then add the change to either the AS or AD.

a. Government increases defence spending.

b. Imported raw materials get cheaper.

c. Congress cuts corporate income tax.

Reference no: EM1314576

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